Industrial Policy in an hyper‐connected world Mario Cimoli, Deputy Executive Secretary, UN‐ECLAC Outline Waves of Industrial Policy strategies A globalized and hyper‐connected world Global structural changes: GVCs and production strategies Technological revolution: a new world for industries Is manufacturing still manufacturing? Industrial Policy today: promoting technology‐ecosystems Learning from emerging trends: which industrial policy for LACs? 1940s‐1970s 1980s‐1990s 2000s 2010s‐2020s

Liberalization and poverty Digital economy and Economic Economic development through ITC and Knowledge as key factors reduction key to economic innovation in production Development industrialization for development development systems

Increasing international Global structural changes. Correct market failures through Market functioning determines Rational for Policy competition. Systemic failures in Financial crisis highlighted structural coordination countries’ specialization global economy. systemic failures.

Technological and industrial Targeted strategies to increase Create new markets. Structural The best industrial policy is no ecosystems development. Policy strategy productivity. Enabling changes and diversification industrial policy. Competences and institutional environment capabilities strategic assets Smart industrial policies Horizontal policies Vertical Industrial Policy. Focus No productive policies. Opening (vertical but focused on (entrepreneurship) and selective on sectors. Gradual open to to international competition. technology trajectories and Policy level policies (strategic sectors). international competition. Focus on human capital local opportunities). Public‐ National competitiveness Import substitutions development. private setting of national agendas. missions Public procurement. Incentives to Technology development Protect Infant Industries. Hard Foster human capital innovation. Skills and capabilities agencies. Smart public Instruments Infrastructure. Public R&D. accumulation. Horizontal development. Public procurement. Multi‐level Structural funds. innovation policies. procurement. public‐private coordination Strategic management of Capital movement FDI attraction as a strategy to Complementary Management of FDI flows. Focus FDI (assets protection). management. Export‐oriented national specialization. Policies on national competitiveness. Strategic management of productive policies. Modernization of the state international trade (USA) A globalized hyper‐connected world

GLOBAL TRADE RATIO (1900‐2015) WWI 0,7 WWII

0,6

0,5

0,4

0,3

0,2

0,1

6E‐16 Fifth Wave 1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 ‐0,1 First Wave Second Wave Third Wave Fourth Wave

Small Integrated Big Integrated Protectionism World Trade Institutions ? World World

Source: ECLAC based on data from Klasing and Milionis (2014), Penn World Table 9, World Bank.(2017) ITCs and Digital Growth Properties of globalization

The internationalization of competition requires more and more scale to compete Agglomeration‐ in the global arena. This generates agglomeration‐fragmentation dynamics that fragmentation affect productive and technological opportunities, the accumulation of capabilities and the structure of the labour market

Multi‐polarity and Shift of economic and political power and new emerging actors, especially China. Complexity Interconnected economies deeply dependent and responsive to each other.

Problems and challenges are increasing borderless and tackling them usually Interrelated Issues requires coordinated actions.

Growing Persistent trade and current accounts imbalances. Growing asymmetries in Imbalances development and income distribution, between and within countries.

Crisis‐prone The world economy is much more vulnerable and subject to systemic shocks. context Shocks’ propagation scale has increased. Reverting trends in production integration Domestic value added share of total exports ( Global average) 2011

2008

2005

2000

1990

68 70 72 74 76 78 80 Global Structural Changes

Export structure by technology level, world regions (1990,2016) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 2000 2016 1990 2000 2016 1990 2000 2016 1990 2000 2016 1990 2000 2016 1990 2000 2016 1990 2000 2016 Africa Japan LAC LAC(exl.Mexico) Dev Asia UE28 USA BP MBRN MBT MTM MAT Global Structural Changes

• Global Value Chains domaniates international production networks • Countries participate to GVCs according to their national production network • The importance of national and regional industrialization strategies • Specialization in specific segments of international production might cause lock in‐effects • Value captured by major companies in critical stages of the value chain (consequence: concentration of value in tech‐intensive sectors) • One question to think about: is this kind of development strategy working? Technological Revolution is reshaping global production models

Zero marginal cost Industrial Internet Gig economy /sharing economy •New internet‐based •New industrial models and •Business models in which business models of production processes using: temporary positions are production and distribution •Machines and sensors common and organizations of digital goods and connected through the contract with independent services. internet. workers for short‐term •Very low marginal cost of •Robots and machine engagements. distribution and replication. learning. •Production by businesses •‐Cyber‐physical systems. complemented with production by consumers.

• Cognitive abilities, • Re‐skilling and up‐skilling complex problem solving of capabilities in the fields and data analytics, social • Basic digital skills. of software development skills, critical thinking, and data analytics. literacy and active learning. Is manufacturing still manufacturing?

• Manufacturing goes beyond the traditional industry definition and national borders • Manufacturing involves activities across different sectors • Modern manufacturing has a global scale with local ecosystem contributing with components and materials at different production levels • Vertical analysis is not enough to understand manufacturing complex systems “A proper understanding of the “portentously rapid” rate of technological innovation which accompanied American industrialization […] requires that we focus attention on a particular aspect of the changing nature of manufacturing. For this purpose, it is necessary to discard the familiar Marshallian approach, involving as it does the definition of an industry as a collection of firms producing a homogenous product‐ or at least products involving some sufficiently high cross‐ elasticity of demand. For many analytical purposes it is necessary to group firms together on the basis of some features of the commodity as a final product; but we cannot properly appraise important aspects of technological developments in the nineteenth century until we give up the Marshallian concept of an industry as the focal point of our attention and analysis. These developments may be understood more effectively in terms of certain functional processes which cut entirely across industrial lines in the Marshallian sense.” (Rosenberg, 1963 “Technological change in the machine tools industry 1840‐1910”) Is manufacturing still manufacturing? Supply of Industrial Robots Estimated annual supply of industrial robots by industries worldwide ('000 of units)

Unspecified

Others

Food

Chemical, rubber and plastics

Metal

Electrical/electronics

Automotive Industry

0 20406080100120 2014 2015 2016 Source: IFR World Robotics 2017 Is manufacturing still manufacturing? Supply of Industrial Robots

Estimated worldwide annual supply of industrial robots ‐ Czech Republic 2016 ('000 of units) Canada Singapore India Thailand Spain France Mexico Italy Taiwan Germany United States Japan Republic of Korea China 0 20406080100 Asia/Australia Europe America

Source: IFR World Robotics 2017 Source: Fernandez Maclas et al. 2018 A new world for industries

• Technological revolution has redefined the locus of value creation • Value is created by a recombination of complex technology ecosystems • Diffused production technology and capabilities are key • High degree of cross‐sectoral spill‐overs A new world for workers

Jobs Creation Dynamics (2015)

Business and Financial Office and Administrative ‐4759 492 Operations

Manufacturing and Production ‐1609 416 Management

Construction and Extraction ‐497 405 Computer and Mathematical

Art, Design, Entertainment, Sports and Media ‐151 339 Architecture and Engineerin

Sales and Related Legal ‐109 303

Education and Training Installation and Maintenance ‐40 66

Source: WEF (2016) ‐5000 ‐4000 ‐3000 ‐2000 ‐1000 0 1000 Evidence of a paradigm shift

• Tendency to start the reshoring of some industries • Automation reduces the importance of labor cost • On‐demand production • Transportation costs and logistics more and more important • Design and production proximity crucial to R&D • Manufacturing is (and will be) the focus • Dominates trade balances • Foster technological development • Positive externalities for growth in other sectors • Determines innovative advantages

Which policies are then necessary to support a new competitive manufacturing sector? New Industrial Policy

UK Catapult‐High Value Manufacturing Sweden Canada Belgium Produktion 2030 Smart Made Different Manufacturing Netherlands Italy South Korea Smart Industry Italia 4.0 Manufacturing USA Germany Innovation Manufacturing USA Industrie 4.0 China Spain (America First) Made in China 2025 Industria France Conectada Industrie du Futur Japan Portugal India Industrial Value Chain PRODUTECH Make in India

Australia Next wave of manufacturing Smart Manufacturing USA (America First)

The historical trade surplus in Changes in production processes Manufacturing Offshoring of High‐Tech products has been and the emergence of production and R&D centres Rational for Policy converted in a deficit since 2001. technological ecosystem put US undermines competitiveness. Significant Job losses. manufacturing under pressure

Create a business‐friendly Promote US‐based manufacturing Boost advanced manufacturing environment and improve Policy strategy competitiveness R&D and innovation international conditions

Cross‐cutting technologies Sectoral Policies at the State Development of technology initiatives (Robotics, Bio level. Initiatives to boost Policy level infrastructure manufacturing, Etc.) international trade

Incentives to SMEs, Network of manufacturing High‐tech mission oriented Manufacturing tax credit, innovation, Robotics initiatives Instruments initiatives. reduction in energy costs and other high‐tech initiatives

High risk investments to help the Input‐technology strategies: skills, Complementary Tax benefits as a mean do development of new education and energy incentivize US‐based production technologies. Federal investments Policies Renegotiation of FTA (mainly defence) Concrete Initiatives in the US

Initiative Goal Implemented by Industrial Internet Input on standardization; Business Sector Consortium (IIC) new business models Smart Manufacturing Joint pre‐competitive Business Sector Leadership Coalition research on an open (SMLC) platform Business Sector AllSeen Alliance Consumer electronics

Open Connectivity Inter‐system Business Sector Foundation (OCF) communication National Network for Innovation centre, not Manufacturing Innovation specifically focused on Government (NNMI) Industrie 4.0 (DMDI) Made in China 2025

Increase quality of Chinese China aims to be the Broad‐scale industrial upgrading manufacturing and reducing manufacturing superpower in the as a strategy to escape income‐ Rational for Policy dependence on international world by 2025 trap trade for high‐tech

Local government strategies to Increase import‐substitution in Develop national technological upgrade the industrial system all Policy strategy high tech ecosystem over the country

Huge investments in technology Subsidies to indigenous IP and industrial development, development and localization. Top‐down approach: the specifically targeted to Public fund to R&D and government sets objectives and Policy level development of more competitive innovation in strategic industries time horizon technologies (automotive and (semiconductors, robots, energy) batteries) Preferential access to capital to Financial Policies, Technological domestic companies to enhance Investment libraries to promote Instruments and Sectoral funds and business their capacity to acquire investments in MCI2025 sectors subsidies technology and promote their and technology indigenous R&D capabilities

International FDI strategy, Diffusion of State Owned Pre‐establishment restriction to Complementary targeting high‐tech enterprises all Enterprises in high tech all over protect MIC2025 sectors from over the world to acquire the country – technological Policies foreign competition technological capabilities network Concrete Initiatives in China

Initiative Goal Implemented by Internet of Things Center Government ITC Development Shanghai Government Internet Plus Industrial Internet

Enabling system Government Digital Infrastructure transformation Smart Factory 1.0 Industrial ecosystem Business Sector Initiative transformation Industrie 4.0

Industrie 4.0 policy as result of Maintaining Germany coordination of different national unconditional strong position in Development of foreign market Rational for Policy policies (climate, communication, manufacturing energy)

Increase excellence and high‐tech Develop national technological Sector and technology focused in German manufacturing Policy strategy ecosystem – industry networks institutional infrastructure industry

Decentralized institutional structure co‐funded by the Multi‐level approach: Large scale bilateral programs government. Support for industry Government guidelines and with other countries: EU, Japan, Policy level transformation (skills, financial sectorial initiatives USA, South Korea conditions, technological assistance) R&D technology oriented and Institutional networks to increase Subsidies to SMEs (Mittlestand), Instruments R&D and innovation institutions access to R&D founding and bear stable access to finance networks initial R&D costs

Complementary Policies to ensure the increase in Selective control of technology Education and skills programmes private investment and the market by high standards for Policies commitment of the private sector public interventions Concrete Initiatives in Germany

Initiative Sector Implemented by General framework Government Plattform Industrie 4.0 coordinated by government Industrial Association BDEW Industrial Internet

Cross‐sectorial Industrial Association BDI manufacturing initiatives Bitkom ITC Industrial Association VDA Automotive Industry Industrial Association Sectorial engineering ZVEI, VDMA, et al. Industrial Association industry Target Technology/Sector Transport, IoT, artificial intelligence, Industry & production base, SMEs France Big data, HPC, Digital trust, & mid‐caps healthcare, smart cities Generic R&D promotion with focus Large companies, SMEs, Italy on digital and AM industrial universities, research centres transformation Industry: focus on SMEs & micro‐ Digital platforms, Big data, Spain enterprises Collaborative applications Business, industry & research Aerospace, Automotive, Chemicals, Uk organisations Nuclear, Pharma, Electronics Industry & service sector Czech republic No specific focus companies, trade unions Research, academia & industrial & Sweden No specific focus service SMEs Netherlands General Business Community No specific focus

Application Public‐Private Partnerships ICT Innovation Manufacturing for SMEs Digital Sector Partnerships Vanguard Program (Regional Excellence in Manufacturing) New Industrial Policy: Promoting technology ecosystems • Explicit policies: Renewed interest in manufacturing policies; the main approach is cross‐sectoral and is aimed at promoting technology ecosystem • Major focus on: advanced manufacturing, IoT, platforms development and the development of enabling technologies • Increasing awareness that geographically concentrated manufacturing systems (all along the smiling curve) can be a competitive advantage in the technological revolution • Skills and infrastructure development have a key role in all the political packages • Main challenge: transition from traditional manufacturing oriented policies to long‐run policies for technology‐ecosystem development New Industrial Policy: a multi‐level approach

•Imperfect • Undiversified Information production •Imperfect structure Competition •Lock‐in • Externalities •Lack of Market Structural capabilities Failures Problems

Systemic Transition •Transfer failures Failures Problems • Public good • Middle income provision trap • Institutional • Technological gap failures •Knowledge gap Is LAC ready? Low productivity persists… LATIN AMERICA: RELATIVE LABOUR PRODUCTIVITY WITH RESPECT TO THE UNITED STATES AND UNITED STATES’ LABOR PRODUCTIVITY INDEX, 1980‐2016 140.000 80,0

120.000 70,0

60,0 100.000

50,0 80.000 40,0 60.000 30,0 40.000 20,0

20.000 10,0

0 0,0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Manufacturing Productivity LAC Manufacturing Productivity USA Manufacturing Productivity relative to USA

Source: ECLAC on CEPALSTAT and ILO As does the old undiversified productive structure

A. Value Added 35 B. Employment 45 30 1,0 6,7 40

25 35 6,6 4,9 30 0,6 20 23,0 5,1 25 15 20 15,0

10 20,0 15

14,7 10 16,3 5 12,7 5

0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Manufacturing Agriculture Mining Manufacturing Agriculture Mining

Source: ECLAC on CEPALSTAT and ILO With little innovation and technological progress

RESEARCH AND DEVELOPMENT EXPENDITURE AS PERCENTAGE OF SHARES OF TOTAL WORLDWIDE PATENTS, RESIDENTS GDP, SELECTED COUNTRIES AND NON‐RESIDENTS, SELECTED COUNTRIES 2015 1996‐2012

3

2,5

2

1,5

1

0,5

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 East Asia & Pacific European Union Latin America & Caribbean United States

Source: ECLAC, on the basis of UNESCO and WPO Gap in adoption of new technologies

NUMBER OF ACTIVE SENSOR, per capita (2014, 2019P)

East Europe West Europe 2014: 2.4 North America 2014: 4.4 2019: 4.3 2014: 6.1 2019: 8.2 2019: 11.6 Asia‐Pacífic‐Area Africa and Middle East 2014: 1.6 2014: 1.0 2019: 2.5 Latin America 2019: 1.4 2014: 2.0 2019: 2.9

Source: CISCO, 2015 Industrial Policy are necessary for regional catching‐up

INSTALLED IOT SOFTWARES ROBOTS IN MANUFACTURING, 2016 (BILLIONS) (per 10000 of employees) 12 Brazil 66 Argentina 10 Mexico 8 China United Kingdom 6 France 4 Italy United States 2 Germany 0 Japan 2013 2014 2015 2016 2017 2018 2019 2020 Korea 0 100 200 300 400 500 600 Asia/Pacific Latin America North America Western Europe Robotics density World Average

Fuente: International Federation of Robotics, IFR. http://www.ifr.org/news/ifr‐press‐release/survey‐13‐million‐industrial‐robots‐to‐enter‐service‐by‐2018‐799/ Learning from emerging trends: which industrial policy for LACs?

• Horizontal policies are not sufficient • Selective policies are designed to rebuild the foundation of industrial commons (innovative capacity) • Focus on new technologies: knowledge and data key assets • Technical‐scientific know‐how (knowledge generation) • Specialized human capital (skills formation) • Approach similar to vertical policies but focused on skills development • No dichotomy between market and State Industrial Policy effectiveness

• Industrial Policy do not work alone • Capabilities and technological infrastructure matters • Regional Scale can offer a competitive advantage • Institutional features are key to long run coordination