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Working papers: 2013

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WP455: Industrial Policy for the Medium to Long-term

Nicholas Crafts and Alan Hughes

This paper reviews the market failure and systems failure rationales for industrial policy and assesses the evidence on past experience of industrial policy in the UK. In the light of this, it reviews options for reshaping the design and delivery of industrial policy towards UK manufacturing. These options are intended to encourage a medium- to long-term perspective across government departments and to integrate science, innovation and industrial policy.

WP454: Re-industrialisation - A Commentary

Ken Coutts and Robert Rowthorn

The share of manufacturing in UK employment and value-added at current prices ("value-added" for short) has fallen dramatically in recent years. This commentary investigates the feasibility of reversing this decline. The paper explores the implications of four scenarios over the next twenty-five years. These scenarios generate very different trajectories for the share of manufacturing in value-added. A stronger manufacturing sector would grow faster and generate more net exports. However, the share of manufacturing in employment or value-added would be unlikely to increase. Rapid labour-saving productivity growth in the manufacturing sector would limit the growth of employment in this sector despite rising output. It would also drive down the relative price of manufactured goods, thereby holding down the share of the fast growing manufacturing sector in value-added.

WP453: De-industrialisation & the Balance of Payments in Advanced Economies

Ken Coutts and Robert Rowthorn

This paper defines de-industrialisation as a secular decline in the share of manufacturing in national employment. De-industrialisation, in this sense, has been a universal feature of economic growth in advanced economies in recent decades. The paper considers briefly what explains this development and quantifies some of the factors responsible. It then examines the experience of Britain and America, which are two countries that prior to the 2008 financial crisis combined rapid de-industrialisation with a strong overall economic performance. The paper considers both the domestic situation and foreign trade performance of manufacturing industry in these countries. It concludes by examining in detail the British balance of payments, and documenting how improvements in the non-manufacturing sphere have helped offset a worsening performance in manufacturing trade.

WP452: Update of Prospects for the UK Balance of Payments

Ken Coutts and Robert Rowthorn

The paper discusses the enormous structural changes in trade and income flows that have occurred in Britain over the past sixty years. In 1950, Britain was a leading industrial power with a trade surplus in manufactured goods equal to 10% of GDP. There is now a trade deficit in manufactures of 4% of GDP. Over the same period, trade in services has moved into substantial surplus exceeding 4% of GDP. No other large industrialised country has experienced such a large shift in the structure of its trade. The paper uses a small model of the balance of payments to project the main components of the current account consisting of visible trade, invisibles (services), current transfers and net investment income. Various scenarios are considered. Under the most pessimistic scenario, there is a persistent current account deficit of around 5% of GDP. A deficit of this magnitude is not sustainable over the long-run.

WP451: Knowledge Spillovers & Sources of Knowledge in the Manufacturing Sector: Literature Review & Empirical Evidence for the UK

Elif Bascavusoglu-Moreau and Qian Cher Li

This report provides a review of knowledge spillovers and sources of knowledge in the manufacturing sector. The literature reviewed indicates the importance of intangible investments in firms' internal knowledge assets. The weight of evidence also emphasises the importance of firms' absorptive capacity in increasing internal capabilities and in benefiting from external knowledge sources. We also highlight the importance of external knowledge and knowledge-assets (i.e., knowledge spillovers) in determining productivity and competitiveness, as well as the spatial dimension of knowledge flows in particular knowledge clusters. Our study subsequently provides an empirical analysis of firms' knowledge sourcing and cooperation behaviour for innovation activities in the UK manufacturing sector, using establishment-level data from recent four waves of the UK Innovation Survey covering the 2002-2010 period. Following the approach developed in Harris and Li (2009), we have constructed an empirical multi-index of absorptive capacity to measure a firm's ability to internalise and appropriate external knowledge for innovation activities. Our results show substantial heterogeneity across sectors; and overall, manufacturing (especially higher tech or advanced) makes the strongest use of knowledge sources and is associated with highest levels of absorptive capacity followed by Knowledge-Intensive Services (KIS), where the UK has a strong comparative advantage. There is evidence that manufacturers responded to external market conditions in their utilisation of knowledge sources and more specifically, firms were making greater use of knowledge sources in response to the recent economic recession.

WP450: International Industrial Policy Experiences & the Lessons for the UK

Ha-Joon Chang, Antonio Andreoni and Ming Leong Kuan

The present study reviews a diverse set of countries with the most successful industrial policy experiences since the Second World War - namely, the US, Germany, Japan, Italy, Finland, (South) Korea, Singapore, China, and Brazil - with a view to deriving lessons for the UK. In Section 1 an industrial competitiveness benchmarking analysis opens by tracking long term countries' trajectories and revealing the current alarming state of UK's manufacturing. Section 2 discusses some of the key theoretical issues in the debate on industrial policy, namely: (a) different definitions of industrial policy and problems related to the standard distinction between 'horizontal' and 'vertical' measures; (b) the special role of the manufacturing sector in the overall economy, especially as the source of productivity growth, innovation, learning, and resilience; (c) main theoretical justifications for certain widely adopted industrial policy tools and institutions. Section 3, then, reviews the industrial policy experiences of the nine comparator countries. While historical material dating back from the 18th century is covered when appropriate, the focus is more on the recent period, since the 1980s or the 1990s. In Section 4, we draw lessons for the UK's industrial policy from the nine country experiences that we review in Section 3, filtered through the theoretical discussions provided in Section 2. We draw the lessons along several dimensions: (a) the role of 'vision'; (b) institutional settings and policy coordination; (c) finance and corporate governance; (d) promotion of innovation; (e) management of transnational corporations; (f) support for SMEs; (g) skills and training. Finally, section 5 looks ahead for the future of the UK's manufacturing sector and policies, taking into account our theoretical discussions, country case reviews, and the lessons we have drawn from those discussions.

WP449: The Legal Framework Governing Business Firms & its Implications for Manufacturing Scale & Performance: The UK Experience in International Perspective

Simon Deakin

This paper reviews empirical studies examining the economic effects of laws governing the formation, financing and organisation of business firms with the aim of putting the UK experience in a comparative perspective. The literature identifies two models of legal support for manufacturing which imply different directions for policy: on the one hand, the Silicon Valley model of venture capital funded growth which depends on liquid capital markets and flexible labour markets, and the northern European and Japanese model which is based on long-term innovation, stable ownership, and institutionalised worker-management cooperation. The UK has some of the legal features of the Silicon Valley model, but important parts are missing: for example, the Californian rule under which post-employment restraints ('restrictive covenants') are void on the grounds of their anti-competitive effects has no equivalent in the UK. Conversely, although the UK has certain elements of the northern European or east Asian model of institutionalised corporate governance, it is unlikely to be able to replicate the 'productive coalition' approach of these countries as long as the legal framework prioritises shareholder rights and the market for corporate control, and provides limited encouragement for job security. The Silicon Valley and 'productive coalition' models are ideal types which can distract from the fact that most countries, the UK included, are hybrid systems with some of the characteristics of each model. Rather than designing laws and policies exclusively with one model or the other in mind, it may be preferable to consider specific laws and policies on their own merits, while bearing in mind that a given legal rule or policy does not operate in isolation from others and that there may be some 'network effects' in operation due to the way that particular rules interact.

WP448: Agency Theory in Practice: A Qualitative Study of Hedge Fund Activism in Japan

John Buchanan, Dominic Heesang Chai and Simon Deakin

We look at the reaction to hedge fund activism of managers and shareholders in Japanese firms and explore the implications of our findings for agency theory. We use a qualitative research design which treats the standard agency-theoretical model of the firm as only one possible approach to understanding corporate governance, to be tested through empirical research, rather than as an assumption built into the analysis. We find that Japanese managers do not generally regard themselves as the shareholders' agents and that, conversely, shareholders in Japanese firms do not generally behave as principals. Our findings suggest that the standard principal-agent model may be a weak fit for firms in certain national contexts.

WP447: Labour Law & Inclusive Development: the Economic Effects of Industrial Relations Laws in Middle-Income Countries

Simon Deakin, Colin Fenwick and Prabirjit Sarkar

We use leximetric data coding techniques and panel data econometrics to test for the economic effects of laws governing worker representation and industrial action in the large middle-income countries of Brazil, China, India, Russia and South Africa. We find that more worker-protective laws on employee representation tend to be correlated with higher scores on the Human Development Index. By contrast, in the case of laws on industrial action, some negative effects on human development indicators are reported. Our findings imply that laws supporting employee voice and collective bargaining may have beneficial social effects in middle-income countries. We find no rise in unemployment due to more protective labour laws.

WP446: Addressing Labour Market Segmentation: The Role of Labour Law

Simon Deakin

Labour market segmentation is problematic because of its links to poor job quality, inequality and discrimination, on the one hand, and inefficiency in resource allocations, on the other. Segmentation is the result of contractual ordering which is often privately efficient but socially sub-optimal. The law largely reflects the economics forces and social norms which give rise to segmentation, but can amplify and perpetuate its effects. The rise of atypical employment in some contexts and of informal employment in others is at least in part a response to the emergence of the standard employment relationship or SER as a legal model and normative benchmark for certain aspect of labour law, in particular employment protection legislation. Attempts to counter segmentation and informality by extending the scope of the SER, on the one hand, and by accepting atypical forms but aligning them more closely with the SER, on the other, have met with limited success. The most successful strategies for labour law reform are those based on an integrated policy approach in which some flexibilisation of employment protection rules is combined with complementary mechanisms for mutualising labour market risks, including collective bargaining, workplace social dialogue, work-life balance laws, work sharing arrangements, targeted fiscal reforms, and active labour market policy.

WP445: Empirical Analysis of Legal Institutions and Institutional Change: Multiple-Methods Approaches and their Application to Corporate Governance Research

John Buchanan, Dominic Heesang Chai and Simon Deakin

The claim that institutions matter for economic growth and development has so far received a more extensive theoretical treatment than an empirical or methodological one. Basing our approach on a coevolutionary conception of relations between law and the economy, we link theory to method and explore three techniques for analysing legal institutions empirically: 'leximetric' measurement of legal rules, time-series econometrics, and interview-based fieldwork. We argue that while robust measurement of institutions is possible, quantitative techniques have their limits, and should be combined with fieldwork in a multiple-methods approach.

WP444: Absorptive Capacity: The Role of Communities of Practice

Simon Turner

Using a 'process' based conception of absorptive capacity, this paper reports the findings from an ethnography of organizational learning conducted within the marketing department of the UK's postal provider, Royal Mail. Through vignettes of two contrasting marketing projects undertaken in conjunction with external partners, the results show that interorganizational learning is supported by informal practices enacted through communities of practice. This highlights the relatively neglected role of social and material practices in the generation of absorptive capacity, but also shows that the learning produced by communities is mediated by relations of power among these groups. This paper develops the theory of absorptive capacity by shifting attention away from 'prior knowledge' in supporting learning and turning towards the role of everyday interaction and power relations in producing knowledge in practice.

WP443: Twenty Challenges for Innovation Studies

Please note Working Paper 443 has now been superseded by Working Paper 475.

Ben R. Martin

With the field of innovation studies now half a century old, the occasion has been marked by several studies looking back to identify the main advances made over its lifetime. Starting from a list of 20 advances over the field's history, this discussion paper sets out 20 challenges for coming decades. At a conference in 1900, David Hilbert put forward a list of 23 unsolved mathematical problems that were to have a profound influence on the work of mathematicians during the 20th Century. The intention here is to prompt a debate within the innovation studies community on what are, or should be, the key challenges for us to take up, and more generally on what sort of field we aspire to be. It is argued that the empirical focus of our studies has not kept pace with the fast changing world and economy, especially the shift from manufacturing to services and the growing need for sustainability. Moreover, the very way we conceptualise, define, operationalise and analyse 'innovation' seems rooted in the past, leaving us less able to grapple with other less visible or 'dark' forms of innovation.

WP442: Do Labour Laws Increase Equality at the Expense of Higher Unemployment? The Experience of Six OECD Countries, 1970-2010

Simon Deakin, Jonas Malmberg and Prabirjit Sarkar

Using longitudinal data on labour law in France, Germany, Japan, Sweden, the UK and the USA for the four decades after 1970, we estimate the impact of labour regulation on unemployment and equality, using labour's share of national income as a proxy for the latter. We employ a dynamic panel data analysis which distinguishes between short-run and long-run effects of legal change. We find that worker-protective labour laws in general have no consistent relationship to unemployment but are positively correlated with equality. Laws relating to working time and employee representation are found to have beneficial impacts on both efficiency and distribution.

WP441: 'Picking Winners' in a Liberal Market Economy: Modern Day Heresy - or Essential Strategy for Competitive Success?

Sue Konzelmann and Marc Fovargue-Davies

This paper explores the current debate about industrial strategy and the UK's hesitant acceptance of a possible role for the state in addressing the challenges confronting British industry in the wake of the 2007/8 financial crisis. In this context - and following the 2012 London Summer Games - political leaders have been pointing to the strategy that succeeded in reversing the British Olymic team's fortunes following its nadir at the 1996 Atlanta Summer Games; and they are suggesting that there may be lessons for industry. However, the political rhetoric has yet to be translated into action. Analysis of the elite sport strategy, in the light of the evolving literature on industrial strategy and policy suggests that although there are details that are specific to sport, there are also aspects of the general strategic approach that can be used to inform the design and implementation of a strategy aimed at developing and improving the international competitive performance of UK industrial sectors and manufacturers. The significance of the UK elite sport strategy is that it was evolved and successfully implemented in the British social, political and economic context, building on and improving existing institutional capabilities.

WP440: India and the Eurozone: A Commentary on the Political Economy of Adjustment and Correction

Shailaja Fennell, Amandeep Kaur and Ajit Singh

This commentary focuses on the interaction between Eurozone and India with a particular focus on the relationship between changes and economic conditions in these two jurisdictions. In the pre liberalization world, India and the Eurozone were regarded a priori as having little interaction with each other. This story changes with globalization and relatively free capital movements. We highlight some of the important changes which have occurred in the Eurozone and Indian economies and discuss the implications for other regions and countries. The commentary sets out a number of hypotheses and uses broad- brush data to provide the intellectual foundations for our analysis.

WP439: The Limits of Flexible Regulation: Managers' Perceptions of Corporate Governance Codes and 'Comply-or-Explain'

Paul Sanderson, David Seidl and John Roberts

Over the past few years regulatory regimes have become more flexible, adopting risk-based approaches and shifting from rules to principles where regulatees are given a degree of discretion in how they comply. In this way 'one size fits all'. Flexibility such as this is however under threat. The current financial crisis has given rise to calls for more and stronger regulation. Policymakers have to respond but are well aware there are limits - lack of flexibility can hinder innovation and economic growth. So, when does flexible regulation work and when does it not? In what circumstances are regulatees likely to strive to comply with underlying regulatory principles and when are they not? What factors affect regulatee 'buy-in?' To address these questions we examined the use of comply-or-explain in corporate governance. This mechanism can be considered the ultimate in flexible regulation. It allows noncompliance, but only where regulatees provide a convincing explanation acceptable to shareholders. Previously we analysed the compliance records of 260 of the largest UK and German companies (Seidl et al. 2012). For this paper we analyse the accompanying interviews with selected senior managers and directors. We conclude the lessons for policymakers are that successful application of flexible regulation mechanisms such as this is contingent on the presence of powerful and influential monitors and that regulatee buy-in to flexible regulation depends primarily on the extent to which (i) 'soft' regulation is understood as a traditional means of control and, (ii) regulatees are involved in the design, implementation and evaluation of regulation. However, whatever the conditions or circumstances, large companies tend to believe they are under considerable pressure to be seen to fully comply which may ultimately render any in-built operational flexibility redundant. This is more likely to be the case under conditions of uncertainty.