Blog Paul de Bijl: Industrial policy, scale, and strategic independence

Industrial policy

In the wake of last year’s Draghi report, industrial policy will continue to dominate economic headlines for the foreseeable future. The debate ranges from productivity growth and innovation to economic clout and global geopolitics.

This topic obviously touches on competition. Academic research, for example, shows that industrial policy works particularly well in sectors with competition, or if it promotes competition. However, when it comes to size and scale, for example, there seem to be some hiccups. All the more reason to take a closer look at the latter topic and, more specifically, in connection with innovation and strategic independence.

Scale and innovation

Scale is an ingredient for economic clout. European companies need scale to be able to compete with giant competitors from the US and China. Scale can also contribute to productivity growth, unlock more investments in R&D, and facilitate access to capital.
When does scale make a difference? In principle, market concentration is at odds with competition and, by extension, with innovation and productivity, unless innovation actually requires scale. That is why nuance is needed. In that light, Mr. Draghi called for competition authorities to explicitly incorporate innovation in concentration decisions. For example, companies could substantiate how their merger or acquisition promotes innovation (‘innovation defense’). That offers room for innovation-driven mergers.

Scale is not just about individual companies. Another route could lie in industrial clusters and value chains, providing fertile ground for start-ups and cross-pollination within such ecosystems. Newcomers introduce dynamism while there is a balanced distribution of power in the supply chain.

The direction and pace of innovation matter, too. For example, look at the development of technologically complex sectors in China (EVs, solar panels, generative AI, etc.). While Europe finds it difficult to steer such developments, the Chinese economy is transforming at breakneck speed as a result of more centrally-guided innovation in emerging and new sectors.

Without clear guidance of the economy, existing European champions will face increasing global pressure. The question is what that guidance should focus on. Recent research points to a middle-technology trap: R&D by European companies concentrates on mid tech sectors such as the car industry. Mid tech competes by applying innovations, with a lower R&D intensity and growth potential than high tech. This results in a competitive disadvantage vis-à-vis China, for example. It seems more promising to create critical mass in advanced technologies rather than trying to prop up traditional sectors.

The success of such an approach depends on decisive European coordination and guidance, where member states can join in with meaningful building blocks - which also call for guidance and scale. See, for instance, the feasibility study for an ‘AI factory’ in the northern Dutch province of Groningen by the Investment and Development Agency for the Northern Netherlands (NOM).

Scale and strategic independence

Industrial policy is also about power. By definition, power is relative. If others control access to raw materials and assets that we value, then they have power over us. We increase our relative power by reducing our dependence.

Europe is currently struggling with its dependence on US big techs. The largest cloud service providers (CSPs), Amazon’s AWS, Microsoft Azure and Google Cloud, serve approximately 70 percent of the European market (IBM and Oracle come fourth and fifth). The largest European competitors (Deutsche Telekom and SAP) serve approximately two percent. While the major CSPs offer a one-stop shop for storage, monitoring, networks, digitalization, and security, the European providers predominantly offer specific services.
How can we reduce our dependence? Creating a major European CSP could be one answer, but one that is difficult to realize (see Gaia-X). Launching a European initiative takes time, but is not the only option that can serve as a counterbalance. Another option is to create leverage through European-based providers.

One example is the IT division of the Schwarz Group (owner of the German supermarket chain Lidl), which entered the market with its own cloud service. This provider, Schwarz Digits, processes and stores all data in Germany and Austria. The Netherlands also has several small cloud providers with their own equipment and technologies.

Hence, it is possible to have European providers satisfy part of their demand for cloud services. A modest step creates (i) an opportunity to keep data within our borders, as well as (ii) technological expertise and insight into security risks. This double-edged impact increases our data sovereignty and independence, which strengthens our bargaining power vis-à-vis the major CSPs.

How does one take such a step? Governments could, for example, commit to purchasing five to ten percent of their cloud services from European providers. Such a step alone already creates leverage. A coordinated European approach will obviously have the most impact, and helps member states bear geopolitical risks collectively.

Unifying logic

Scale can boost competitiveness. This can be done in various ways, including innovative clusters. Resilience also calls for scale. We can reduce our dependence through leverage, which can be created when governments purchase from European providers, for example in cloud computing. That will, at the same time, boost technological development, which, in turn, contributes to our economic clout. It goes without saying that this must be centrally coordinated at the EU level, while, at the same time, avoiding the pitfall of becoming dependent on powerful European providers.

Paul de Bijl, Chief Economist of ACM