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Industrial Policies for Innovation: A Cost-Benefit Framework

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When and how should governments use industrial policy to direct innovation to specific sectors? Daniel Garcia-Macia and Alexandre Sollaci discuss a framework for analyzing the costs and benefits of industrial innovation policies, revealing that sector-specific fiscal support outperforms sector-neutral support only under stringent conditions while showing that most advanced economies, including China and the U.S., tend to over-subsidize innovation despite broadly targeting the right sectors.

Image courtesy of interviewee. November 13, 2024

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This video discusses the increasing trend of industrial policies aimed at fostering innovation in specific sectors to enhance productivity growth while addressing issues such as security and climate change. It highlights various national programs such as the CHIPS Act (US), K Chips Act (Korea), and the EU's Green Deal, which focus on sectors like semiconductors and green technology.

Many of these policies include fiscal incentives, such as R&D subsidies and tax cuts, but pose risks due to their high costs, especially amid existing government debts. The authors propose a quantitative framework to help governments determine how and when to effectively implement industrial policies, emphasizing the importance of targeting sectors with significant knowledge spillovers and social benefits.

The paper also addresses potential pitfalls, such as misallocation of resources due to political influence or lack of information, which can diminish the effectiveness of these policies. Historical examples demonstrate that poorly executed industrial policies often fail. The authors advocate for cautious implementation, clear objectives, and an emphasis on measuring external benefits and domestic spillovers.

Key recommendations include strengthening technical capacity in policymaking, setting benchmarks for progress, and ensuring accessible support across firms to foster competition. Future research should explore the broader implications of industrial policies, such as trade barriers and their influence on international dynamics, especially in a context of geo-economic fragmentation. This video concludes that effective industrial policy is contingent upon clear goals, robust sector targeting, and preventing misallocation to maximize social welfare and innovation outcomes.

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Here are 5 key points from the video regarding industrial policy and innovation:

1. **Rise of Industrial Policy**: There is a growing trend of countries implementing new industrial policies aimed at boosting innovation in specific sectors, intending to address productivity growth, security concerns, and climate change. Examples include the CHIPS Act in the U.S. and the Green Deal Industrial Plan in Europe.

2. **Framework for Evaluation**: The development of a quantitative framework is proposed to help governments effectively allocate resources for industrial policies by identifying which sectors benefit most from targeted innovation support. The framework should consider both the benefits and the risks, including potentially misdirected support due to insufficient information or political influence.

3. **Importance of Knowledge Spillovers**: Different sectors generate varying levels of research spillovers that can benefit the wider economy. Certain sectors, like basic science, are highlighted for their higher potential to create spillovers, and policies should be designed to maximize support for these high-spillover sectors.

4. **Risks of Misallocation**: Poor implementation of industrial policies can negate potential benefits, with risks such as political capture leading to misallocation of resources. Both political influence and random mistakes in policy execution can significantly hinder the effectiveness of industrial policies.

5. **Conditions for Effective Policies**: For industrial policies to be effective, several conditions must be met: the externalities of targeted sectors must be identifiable and measurable, domestic knowledge spillovers must be substantial, and government capacity must be strong enough to manage potential political capture. Additionally, there's a recommendation for governments to improve technical capacity and transparency when monitoring industrial policy performance.

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Here are some key quotes from the video that capture the main ideas and themes:

1. **Industrial Policy Trend:**
"Industrial policy is on the rise. Many countries have been implementing new industrial policy packages."

2. **Goals of Industrial Policy:**
"They try to boost innovation in specific sectors in the hope of reigniting productivity growth, but also addressing other goals like security issues or mitigating climate change."

3. **Examples of Initiatives:**
"To name a few examples, we have the CHIPS Act in the US or the K Chips Act in Korea, which promote research in semiconductors, but also the Green deal industrial plan in the European or IRA, which focus on green innovation."

4. **Resource Allocation Warning:**
"Governments should use these resources wisely in a way that maximizes productivity, growth, and social welfare."

5. **Quantitative Framework for Policymaking:**
"Our paper comes in to develop a quantitative framework that can guide governments as to when and how they should use industrial policy for innovation."

6. **Benefits of Targeting Innovation:**
"The framework should certainly capture the benefits of targeting innovation support to specific sectors as opposed to doing uniform support across the economy."

7. **Risks of Poor Implementation:**
"Poor implementation can quickly turn the potential gains of industrial policy into losses, making sector neutral support preferable."

8. **Importance of Clear Goals:**
"The goals of this policy need to be very clear, and well defined from the start."

9. **Economic Benefits of Targeted Support:**
"If it optimally targets innovation support to sectors with higher knowledge spillovers to other sectors, it can increase welfare by almost 3% relative to providing uniform support across sectors."

10. **Challenges of Political Capture:**
"A small amount of misallocation due to political capture can actually wipe out all the potential gains from industrial policy."

11. **Need for Government Capacity:**
"Government capacity must be high to avoid political capture."

12. **Recommendations for Policymakers:**
"Our recommendation is that they strengthen technical capacity in order to be able that they set clear benchmarks, so they can monitor progress and then discontinue any programs that don’t perform well."

13. **Call for Granular Research:**
"Our paper provides general guidelines for industrial policy for innovation across sectors and countries. But we think that more granular research would be helpful in a few areas."

These quotes highlight the key points discussed in the video, including the challenges and considerations of implementing industrial policy for innovation in various sectors.

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Industrial policy is on the rise.

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Many countries have been implementing new

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industrial policy packages.

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And one common element in those packages is that they try

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to boost innovation in specific sectors in the hope

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of reigniting productivity growth,

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but also addressing other goals like security issues

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or mitigating climate change.

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To name a few examples, we have the CHIPS Act in the US

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or the K Chips Act in Korea,

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which promote research in semiconductors,

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but also the Green deal industrial plan in the European

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Union, or the Inflation Reduction Act in the US

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or IRA, which focus on green innovation.

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And all these new policies also add

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to longstanding policies in emerging market economies like

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China, which, for a long time have been trying to,

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advance domestic technology in priority sectors like

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electric vehicles or artificial intelligence.

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Now, most of these packages include fiscal incentives

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for targeted innovation.

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Uh, this, this take the form of research and development

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or r and d, subsidies, but also r and d tax cuts

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or public r and d.

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And these policies are costly

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and they come at a time when many governments are already

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highly indebted.

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Um, so governments should use these resources wisely

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in a way that maximizes productivity,

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growth, and social welfare.

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And this is precisely where our paper comes in.

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We realize that it would be helpful

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to develop a quantitative framework

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that can guide governments as to when

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and how they should use industrial policy for innovation.

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This framework should certainly capture the benefits

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of targeting innovation support to specific SEC sectors

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as opposed to doing uniform support across the economy.

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Uh, so some sectors,

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may generate more knowledge spillovers to other sectors,

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or innovation in certain sectors can also lead

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to other social benefits like,

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reducing carbon emissions in the case of green innovation.

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But the framework should also capture the costs.

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And here we're not just talking about fiscal costs,

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but also the risk that if,

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policies are not implemented correctly,

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they can end up misdirecting support to the wrong sectors.

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And this could happen, either

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because, you know,

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when the government doesn't have enough information

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about the economy, about the nature of, social benefits

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of different sectors, or,

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in the case when certain sectors have more political power

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and are able to capture more resources from the government.

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And these are not just theoretical considerations.

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Uh, if we look at the history of industrial policies

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for innovation, even in advanced economies,

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we see many examples of policies that didn't deliver

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and, programs that had to be abandoned.

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So our framework allows us to quantify this balance of costs

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and benefits of industrial policies

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for innovation across different countries,

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but also to assess whether

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existing policies are targeting the right sectors

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and whether they're doing so in the right amount.

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The point of having industrial policies, which

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for us in our framework is mainly just different subsidies,

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for different sectors, is that

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different sectors can have different research spillovers

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to other sectors.

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But research spillovers, we mean just, you know,

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when someone comes up with a new idea

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or a new product, it's gonna make it easier

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for future researchers to,

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build their own new research projects

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because they can, of course, you know, build on top of,

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of what's being done before.

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When you put this in a sectoral perspective, it's

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very possible that some sectors

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provide more spillovers than others.

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And this is usually the case for basic science.

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For example, basic scientists tend

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to generate higher spillovers than in other sectors.

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You can think of the laser as an example,

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which really just started out, as research done

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by theoretical physicists that were trying

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to understand the properties

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of electromagnetic magnetic radiation.

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Um, and nowadays it has applications that go from,

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you know, fiber optic communication to wide surgery

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and basically everything else in between.

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Um, and then if we take a step back economically,

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what this means is that if we're trying

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to provide an optimal policy, this policy should then

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intuitively give more benefits to these sectors

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that create higher spillovers.

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Um, but then to take into account all

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of the spillovers created

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and received by every single sector in the economy, we sort

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of need a model that's going to,

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filter all this information in

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and then give us a measure of welfare

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or something like that, that we can understand

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and then rank different policies based on that.

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And once we have this, the advantage is

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that we can then also figure out

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what is the best configuration of subsidies across sectors

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that is going to give us the higher welfare,

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in the economy.

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So this is what was done in, in a recent paper by Ernest Lu

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and Song ma, which is a base of our own analysis,

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but there's a, another issue that comes into play,

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which is the implementation of these policies.

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So it's not uncommon for policies

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to face implementation issues, as they're trying to

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to be rolled out by governments.

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And this could come in the form,

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of having politically powerful sectors able to sort

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of gather more benefits to themselves

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or simply just random mistakes that policy makers might do,

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when they're trying to define,

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which sector gets what.

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Either way, both of these things are going to move the

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actual policy or the actual implemented policy away,

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from the optimal level

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and sort of reduce how efficient this policy is

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and actually generating more innovation.

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And then I think the last important point to, to make is

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that when you're defining which policy you're going

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to implement, the goals of this policy need

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to be very clear, and well defined from the start.

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Um, so for example, if you're just trying to design

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some policy that maximizes the amount of innovation

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that is done in the economy,

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you might not really care too much about

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what are the green sectors, what aren't the green sectors.

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On the other hand, if you want

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to actually implement more innovation in the greener sectors

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because of other reasons, environmental, for example, the

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optimal policy scheme changes in order

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to reflect this choice that you had at the beginning.

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And this is true for any other issue that you can think of.

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So we also show in the paper, for example,

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on our baseline optimal policy,

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just trying to maximize innovation.

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Um, the subsidy to each sector is going to be

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virtually uncorrelated with the exposure to AI that

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that sector has, which is something

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that we might care about, especially going to the future.

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And if we do, it needs to then be, implement

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or sort of taken into account

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as this policy is being defined in the first place.

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Our model simulations show

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that the large advanced economy think of the us

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if it optimally targets innovation support to sectors

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with higher knowledge spillovers to other sectors,

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it can increase welfare by almost 3% relative

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to providing uniform support across sectors.

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So this is equivalent

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to a permanent 3% increase in consumption,

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and these gains can go up to 6%.

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If in addition, the government also takes into account the

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goal to increase green innovation

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by reallocating more support to sectors with a higher share

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of green patents.

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However, and this is a very important caveat,

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poor implementation can quickly turn the potential gains

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of industrial policy into losses,

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making sector neutral support preferable.

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Uh, poor implementation can result either from political

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capture by certain sectors that are more influential

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or simply because the government doesn't have enough

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information either about the social benefits

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of cer certain sectors or about, firm's activities.

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So let me discuss these, these two possibilities.

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In turn, regarding political capture,

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we will use two alternative methods, to try

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to measure the political influence of sector.

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First we look at the markup in sector,

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and the idea which is based on previous literature is

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that sectors with, larger markets, sorry, firms

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with larger market shares

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or higher markups also tend to employ more politicians.

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And firms that employ more politicians are also able to,

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influence the allocation of government support

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and capture more, more benefits from the government.

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And second, as an alternative, we also look at the share

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of, lobbying expenses by each sector in the us,

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in order to gauge how much each sector is investing in,

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in building political influence,

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but actually under either methods,

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the results are quite similar.

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And the result is that a small amount of misallocation due

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to political capture can actually wipe out,

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all the potential gains from industrial policy.

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Now, turning to the other case,

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which is when the government makes, random mistakes,

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when allocating innovation subsidies,

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because it doesn't have enough information.

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The result here, somewhat surprisingly, is

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that random mistakes are as harmful as a political capture

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for social welfare, if not worse.

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Uh, because in the case of political capture, what we see is

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that sectors that generate more knowledge spillovers

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to other sectors are also sectors that tend to have,

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high markups and, and more political power.

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So in a way, when, the allocation of resources is driven

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by political influence, it may not be as bad

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as when it's simply a result of random mistakes

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due to lack of information.

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To answer this question, it's useful to just, you know,

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step a step back a little bit

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and, go back to what is the reason

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to have industrial policies in our framework to begin with.

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Um, and the reason is that you have sectors

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that create more spillovers to other sectors.

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Well, the point is that not all spillovers come from

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research that is done in your own country.

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So, and we can actually measure this

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by looking at patent citations, across, countries.

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So parents work a lot like academic papers

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or books in the sense that they will cite all

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of the prior research that's relevant to them.

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And because we can link all the patents to their authors

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and their authors to their location,

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we can actually create this network

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of patent citations across countries, sector by sector.

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And this also tells us things like, about 30%

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of all the citations from patents done in the US

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go from research that was done in other countries.

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And this is by the way, the largest,

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share that we get in the data.

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So the typical European country, for example, will have 90%

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of those citations go to research done in other countries.

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Then this creates a bit of a wrinkle for,

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for the policymaking process,

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because industrial policies, at least in the sense

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that we define them as these sub sector specific RD

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subsidies, will mostly

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affect the domestic output research output or inputs

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or, you know, however you want to define them.

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But the point is that, if the bulk,

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of the spillovers

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or the citations for scientists in say,

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country A are actually coming from other research done in

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countries B, C, or D,

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then the gains from industrial policy in country A are going

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to be greatly reduced, essentially because, the r

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and d done in this country A,

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is not really affecting the bulk of the spillovers received

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by the companies or researchers in country a as well.

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Empirically, we can actually compare the results

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of the actual policies, in several advanced economies,

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across the world with what the model says.

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It's the optimal, allocation of r and d resources.

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And if we do that, we do find a positive correlation,

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meaning that, policymakers are somewhat able to identify

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which are the sectors that provide the highest spillovers

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for the economy,

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and subsidize these sectors at higher rates.

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But we also find that the concentration

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of these resources in the data tends to be much higher than

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what the model will suggest.

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Um, meaning that scaling back of some

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of these policies might be beneficial from a lot

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of countries, that, that we look at in the sense

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that they're over subsidizing a few of those sectors

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that they think are going to be,

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the key sectors in the future.

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O overall the results of our paper such as

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that governments should be cautious, when it comes

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to industrial policies for innovation,

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because those only beneficial under fairly

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restrictive conditions.

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Uh, we identify three such conditions.

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First, that externalities

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or social benefits of targeted sectors must be easily

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identified and measurable.

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And reducing carbon emissions is one example

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of when that is possible.

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Second, the domestic knowledge spillovers

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of targeted sectors must be strong enough.

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And third, government capacity must be high

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to prevent misallocation, for example, due

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to political capture as, my coauthor Alex Explains.

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Um, we do find that, countries,

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or leading economies are actually targeting broadly the

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right sectors that may be,

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to an excessive degree in some cases.

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And so they should pair back the size

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of their industrial policies.

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But for governments that do want

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to implement industrial policies, our recommendation is

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that they strengthen technical capacity in order to be able

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to vet the projects they subsidize,

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that they set clear benchmarks, so they can monitor

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progress and then discontinue any programs that

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that don't perform well as opposed to letting sort

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of policy, policy, inertia take over.

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And governments should also conduct an exhaustive assessment

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of fiscal costs and risks to avoid fiscal surprises.

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And more broadly, they should make sure

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that programs are accessible across all firms in order

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to foster competition.

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Now, thinking about future research,

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our paper provides general guidelines for industrial policy

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for innovation across sectors and countries.

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But we think that more granular research would be

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helpful in a few areas.

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For example, governments are not always

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so transparent when they report the size

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of their industrial policies.

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So more empirical work, is needed here to, to quantify

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that across countries.

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Also, our paper focused on innovation subsidies,

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but industrial policies include other instruments

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that could also affect innovation, like trade barriers,

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regulatory advantages for certain sectors

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or, even directed allocation

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of credit in some countries.

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But also they, they, include policies

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that benefit certain firms,

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in a given sector more than others, for example,

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when governments try to create industrial champions.

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So looking at, at the effects

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of those policies would be interesting.

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And finally, I think in, in our current context

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of geo-economic fragmentation,

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it would also be very important to try to understand

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strategic interaction between countries.

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So strategic considerations mean that a country

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can take certain policy actions that do not benefit it,

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immediately, but that are taken in the hope

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of influencing the behavior of other competitor countries.

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Now, of course, we think that this is a slippery slope,

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not only because it can lead to retaliation, but also

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because as we mentioned,

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all countries rely on innovation don abroad.

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But still, it is very important

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to understand the incentives of countries for doing so.

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If we are to prevent, geo-economic fragmentation

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that can end up reducing the world's innovative capacity

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and productivity.

Rising Industrial Policies: Fostering Innovation and Addressing Global Challenges

00:00:00 - Industrial policy is on the rise. Many countries have been implementing new industrial policy packages. And one common element in those packages is that they try to boost innovation in specific sectors in the hope of reigniting productivity growth, but also addressing other goals like security issues or mitigating climate change. To name a few examples, we have the CHIPS Act in the US or the K Chips Act in Korea, which promote research in semiconductors, but also the Green deal industrial plan in the European

00:00:37 - or IRA, which focus on green innovation. And all these new policies also add to longstanding policies in emerging market economies like China, which, for a long time have been trying to, advance domestic technology in priority sectors like electric vehicles or artificial intelligence. Now, most of these packages include fiscal incentives for targeted innovation.

00:01:08 - or r and d, subsidies, but also r and d tax cuts or public r and d. And these policies are costly and they come at a time when many governments are already highly indebted. so governments should use these resources wisely in a way that maximizes productivity, growth, and social welfare. And this is precisely where our paper comes in.

Guiding Industrial Policy for Innovation: Benefits, Costs, and Risks

00:01:37 - to develop a quantitative framework that can guide governments as to when and how they should use industrial policy for innovation. This framework should certainly capture the benefits of targeting innovation support to specific SEC sectors as opposed to doing uniform support across the economy. so some sectors, may generate more knowledge spillovers to other sectors, or innovation in certain sectors can also lead

00:02:08 - reducing carbon emissions in the case of green innovation. But the framework should also capture the costs. And here we're not just talking about fiscal costs, but also the risk that if, policies are not implemented correctly, they can end up misdirecting support to the wrong sectors. And this could happen, either because, you know, when the government doesn't have enough information about the economy, about the nature of, social benefits

00:02:41 - in the case when certain sectors have more political power and are able to capture more resources from the government. And these are not just theoretical considerations. if we look at the history of industrial policies for innovation, even in advanced economies, we see many examples of policies that didn't deliver and, programs that had to be abandoned. So our framework allows us to quantify this balance of costs

Enhancing Innovation Through Targeted Industrial Policies

00:03:11 - for innovation across different countries, but also to assess whether existing policies are targeting the right sectors and whether they're doing so in the right amount. The point of having industrial policies, which for us in our framework is mainly just different subsidies, for different sectors, is that different sectors can have different research spillovers to other sectors. But research spillovers, we mean just, you know,

00:03:42 - or a new product, it's gonna make it easier for future researchers to, build their own new research projects because they can, of course, you know, build on top of, of what's being done before. When you put this in a sectoral perspective, it's very possible that some sectors provide more spillovers than others. And this is usually the case for basic science. For example, basic scientists tend to generate higher spillovers than in other sectors. You can think of the laser as an example, which really just started out, as research done

00:04:16 - to understand the properties of electromagnetic magnetic radiation. and nowadays it has applications that go from, you know, fiber optic communication to wide surgery and basically everything else in between. and then if we take a step back economically, what this means is that if we're trying to provide an optimal policy, this policy should then intuitively give more benefits to these sectors

Modeling Spillovers for Effective Policy Implementation

00:04:47 - but then to take into account all of the spillovers created and received by every single sector in the economy, we sort of need a model that's going to, filter all this information in and then give us a measure of welfare or something like that, that we can understand and then rank different policies based on that. And once we have this, the advantage is that we can then also figure out what is the best configuration of subsidies across sectors

00:05:18 - in the economy. So this is what was done in, in a recent paper by Ernest Lu and Song ma, which is a base of our own analysis, but there's a, another issue that comes into play, which is the implementation of these policies. So it's not uncommon for policies to face implementation issues, as they're trying to to be rolled out by governments. And this could come in the form,

00:05:49 - of gather more benefits to themselves or simply just random mistakes that policy makers might do, when they're trying to define, which sector gets what. Either way, both of these things are going to move the actual policy or the actual implemented policy away, from the optimal level and sort of reduce how efficient this policy is and actually generating more innovation. And then I think the last important point to, to make is

Defining Clear Objectives for Effective Innovation Policies

00:06:23 - to implement, the goals of this policy need to be very clear, and well defined from the start. so for example, if you're just trying to design some policy that maximizes the amount of innovation that is done in the economy, you might not really care too much about what are the green sectors, what aren't the green sectors. On the other hand, if you want to actually implement more innovation in the greener sectors because of other reasons, environmental, for example, the

00:06:55 - to reflect this choice that you had at the beginning. And this is true for any other issue that you can think of. So we also show in the paper, for example, on our baseline optimal policy, just trying to maximize innovation. the subsidy to each sector is going to be virtually uncorrelated with the exposure to AI that that sector has, which is something that we might care about, especially going to the future. And if we do, it needs to then be, implement

00:07:26 - as this policy is being defined in the first place. Our model simulations show that the large advanced economy think of the us if it optimally targets innovation support to sectors with higher knowledge spillovers to other sectors, it can increase welfare by almost 3% relative to providing uniform support across sectors. So this is equivalent to a permanent 3% increase in consumption, and these gains can go up to 6%.

Challenges in Implementing Industrial Policy for Green Innovation

00:07:59 - goal to increase green innovation by reallocating more support to sectors with a higher share of green patents. However, and this is a very important caveat, poor implementation can quickly turn the potential gains of industrial policy into losses, making sector neutral support preferable. poor implementation can result either from political capture by certain sectors that are more influential

00:08:28 - information either about the social benefits of cer certain sectors or about, firm's activities. So let me discuss these, these two possibilities. In turn, regarding political capture, we will use two alternative methods, to try to measure the political influence of sector. First we look at the markup in sector, and the idea which is based on previous literature is that sectors with, larger markets, sorry, firms

00:09:00 - or higher markups also tend to employ more politicians. And firms that employ more politicians are also able to, influence the allocation of government support and capture more, more benefits from the government. And second, as an alternative, we also look at the share of, lobbying expenses by each sector in the us, in order to gauge how much each sector is investing in, in building political influence,

Impact of Political Capture and Mistakes on Industrial Policy Effectiveness

00:09:33 - the results are quite similar. And the result is that a small amount of misallocation due to political capture can actually wipe out, all the potential gains from industrial policy. Now, turning to the other case, which is when the government makes, random mistakes, when allocating innovation subsidies, because it doesn't have enough information. The result here, somewhat surprisingly, is that random mistakes are as harmful as a political capture

00:10:07 - because in the case of political capture, what we see is that sectors that generate more knowledge spillovers to other sectors are also sectors that tend to have, high markups and, and more political power. So in a way, when, the allocation of resources is driven by political influence, it may not be as bad as when it's simply a result of random mistakes due to lack of information. To answer this question, it's useful to just, you know,

00:10:38 - and, go back to what is the reason to have industrial policies in our framework to begin with. and the reason is that you have sectors that create more spillovers to other sectors. Well, the point is that not all spillovers come from research that is done in your own country. So, and we can actually measure this by looking at patent citations, across, countries. So parents work a lot like academic papers

Global Patent Citations and Industrial Policy Impacts

00:11:09 - of the prior research that's relevant to them. And because we can link all the patents to their authors and their authors to their location, we can actually create this network of patent citations across countries, sector by sector. And this also tells us things like, about 30% of all the citations from patents done in the US go from research that was done in other countries.

00:11:39 - share that we get in the data. So the typical European country, for example, will have 90% of those citations go to research done in other countries. Then this creates a bit of a wrinkle for, for the policymaking process, because industrial policies, at least in the sense that we define them as these sub sector specific RD subsidies, will mostly affect the domestic output research output or inputs or, you know, however you want to define them.

00:12:14 - of the spillovers or the citations for scientists in say, country A are actually coming from other research done in countries B, C, or D, then the gains from industrial policy in country A are going to be greatly reduced, essentially because, the r and d done in this country A, is not really affecting the bulk of the spillovers received by the companies or researchers in country a as well.

Guidelines for Effective Industrial Policy and R&D Allocation

00:12:43 - of the actual policies, in several advanced economies, across the world with what the model says. It's the optimal, allocation of r and d resources. And if we do that, we do find a positive correlation, meaning that, policymakers are somewhat able to identify which are the sectors that provide the highest spillovers for the economy, and subsidize these sectors at higher rates.

00:13:13 - of these resources in the data tends to be much higher than what the model will suggest. meaning that scaling back of some of these policies might be beneficial from a lot of countries, that, that we look at in the sense that they're over subsidizing a few of those sectors that they think are going to be, the key sectors in the future. O overall the results of our paper such as that governments should be cautious, when it comes to industrial policies for innovation,

00:13:46 - restrictive conditions. we identify three such conditions. First, that externalities or social benefits of targeted sectors must be easily identified and measurable. And reducing carbon emissions is one example of when that is possible. Second, the domestic knowledge spillovers of targeted sectors must be strong enough. And third, government capacity must be high

Guidelines for Effective Industrial Policy Implementation

00:14:17 - to political capture as, my coauthor Alex Explains. we do find that, countries, or leading economies are actually targeting broadly the right sectors that may be, to an excessive degree in some cases. And so they should pair back the size of their industrial policies. But for governments that do want to implement industrial policies, our recommendation is that they strengthen technical capacity in order to be able

00:14:49 - that they set clear benchmarks, so they can monitor progress and then discontinue any programs that that don't perform well as opposed to letting sort of policy, policy, inertia take over. And governments should also conduct an exhaustive assessment of fiscal costs and risks to avoid fiscal surprises. And more broadly, they should make sure that programs are accessible across all firms in order to foster competition.

00:15:21 - our paper provides general guidelines for industrial policy for innovation across sectors and countries. But we think that more granular research would be helpful in a few areas. For example, governments are not always so transparent when they report the size of their industrial policies. So more empirical work, is needed here to, to quantify that across countries. Also, our paper focused on innovation subsidies,

Impact of Trade Policies on Innovation and Geoeconomic Relations

00:15:53 - that could also affect innovation, like trade barriers, regulatory advantages for certain sectors or, even directed allocation of credit in some countries. But also they, they, include policies that benefit certain firms, in a given sector more than others, for example, when governments try to create industrial champions. So looking at, at the effects of those policies would be interesting. And finally, I think in, in our current context

00:16:24 - it would also be very important to try to understand strategic interaction between countries. So strategic considerations mean that a country can take certain policy actions that do not benefit it, immediately, but that are taken in the hope of influencing the behavior of other competitor countries. Now, of course, we think that this is a slippery slope, not only because it can lead to retaliation, but also

00:17:11 - all countries rely on innovation don abroad. But still, it is very important to understand the incentives of countries for doing so. If we are to prevent, geo-economic fragmentation that can end up reducing the world's innovative capacity and productivity.

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