Government-business collaboration in industrial policy: what factors determine its success? Erkki Karo1 and Rainer Kattel2 Ragnar Nurkse School of Innovation and Governance Tallinn University of Technology, Estonia Abstract In this paper we discuss the question of what factors in development policy create specific forms of policy capacity and under what circumstances development-oriented complementarities or mismatches between the public and private sectors emerge. We develop the notion of policy capacity into a concept that reflects the variety of modes of making policy that originate from co-evolutionary processes between political and policy ideas, public management and private-sector dynamism. We argue that the interactions between these factors are reflected in three interlinked policy choices, each fundamentally evolutionary in nature: policy choices on understanding the nature and sources of technical change and innovation; policy choices on the ways of financing economic growth, in particular technical change; and third, policy choices on the nature of public management to deliver and implement both previous sets of policy choices. We argue that the way these choices create the division of tasks between public and private sector (e.g., how much and how will government finance and support private sector innovation activities) determines also the eventual embeddedness between state and market actors and types of collaborations feasible (from highly engaged and embedded to more distant and formal/hierarchical) in a particular setting. We illustrate our argument with brief cases studies of economic development in East Asia and Eastern Europe. 1 Erkki Karo is a Research Fellow at Ragnar Nurkse School of Innovation and Governance, Tallinn University of Technology (Estonia). His research concentrates on governance of development and innovation policies in developing and catching-up economies. Contact: [email protected]. 2 Rainer Kattel is a Professor at Ragnar Nurkse School of Innovation and Governance, Tallinn University of Technology (Estonia). He has published on topics bridging the fields of public administration, economics and innovation. His most recent books include: Lember, V., Kattel, R. and Kalvet, T., eds (2013), Public Procurement for Innovation: International Perspectives (Springer); Kattel, R., Burlamaqui, L. and Castro, A.C., eds (2012), Knowledge governance: reasserting the public interest. London (Anthem Press); Kattel, R., Kregel, J. and Reinert, E.S., eds (2009) Ragnar Nurkse: Trade and Development (Anthem Press). Contact: [email protected]. 1 Introduction Debates on technological and economic development have since at least the ‘developmental state’ era in East Asia dealt among other issues with the question of how do develop institutional settings that support economic-development-oriented government-business collaborations (see Johnson 1982; Amsden 1989; Wade 1990; Evans 1995), but also that control for the threats of cronyism and corruption potentially stemming from these same relations (see Gomez 2002; Kang 2002). The studies with a more positive perspective argue that industrial policy of the developmental state was in essence based on a mix of formal and informal collaborative mechanisms between state and business ranging from governments granting policy loans, guaranteeing other loans, procuring industrial products to providing ‘administrative guidance’ in the form of informal counseling, negotiations, commitments etc. These same studies also argued that development-orientated linkages and collaborations grew out of specific forms of bureaucracies and its’ closeness to the business sector (relations of co-dependence, or if looked from the side of public sector, embedded autonomy); or in other words, government-business collaborations could be seen as natural forms of capitalist development. At the same time, many of the mentioned collaborative instruments have temporal limitations: given the political constraints of globalization (i.e., spread of WTO rules) and economic dynamics of globalization (i.e., emergence of global production and innovation networks) many of the traditional instruments of industrial policy are by now outright illegal in the new international policy context (see Wade 2003), or have become ineffective as businesses tend to become less local and more linked to global competitive dynamics (see Ernst 2009; Yeung 2010; 2013). Thus, 2 there is no agreement (and indeed cannot be) on what kind collaborative relationships, and what kind of role of the state, is optimal. Also, especially in the context of developing economies, we have learned that business-government collaborations may very often not lead do development-oriented processes and outcomes. Most economic research explains the success or failures by either good or poor state capacities (see Grindle 1996; Reinert 2007; Acemoglu and Robinson 2012). In sum, both development-oriented and failed settings of industrial policy and government- business collaborations are somehow linked to state capacities. In this paper we see the dynamism of government-business linkages and collaborations as natural outcome of techno-economic developments (see Perez 2002). We try to show that understanding the role of the state in this setting requires a dynamic or evolutionary understanding of how state capacities stem from different institutional settings and from the feedback linkages between these settings and private sector dynamism. In the next section we unpack the concept of state/policy capacity and link it to our approach to development policy debates. Thereafter we propose a co- evolutionary framework to understand policy capacity in the context of development policy. We illustrate our argument with brief discussions of how East Asian and Eastern European have built and transformed its’ development strategies and business-government interactions. Using our framework, we show what kind of policy capacity has been created by, and evolved in, specific co-evolutionary processes; or how political vision, public policies and their management and private- sector dynamism came together in specific contexts. 3 1. Unpacking and contextualizing state and policy capacity To build our analytical perspective, we contend that strictly speaking there is no such thing as policy – policies exist, that is they become reality, only through their implementation. Implementation means concrete people in a concrete organization with their values, legal and power basis, coalitions and interactions with other public- and private sector organizations. These public-sector organizations – the part of the public sector that we can call public management – have their rules how they recruit and promote people, how they understand their own, and others’ performance and accountability, indeed their entire set of tasks. Further, as concrete people, managers and civil servants are the ones implementing policy, and they are the ones having contact with the subjects of a given policy – in case of economic and technology policy, private companies mostly, but also universities, labor unions, industry associations, etc. So, often implementation becomes crucial for what the given policy is and does. Because of learning and feedback mechanisms between civil servants and private-sector actors, entrepreneurs and others actors in the policy-implementation phases, implementation also becomes key for how the given policy is evaluated, and changed if needed. Thus, the realization of policy ideas through implementation is conditioned by different factors from culture to geography to time. We argue that it is impossible to understand state and policy capacity, how it is generated, maintained and changed, without public management. Thus, we use state and policy capacity as a concept as it is used in public administration/management literature, referring to meso- and micro-level processes of public-policy-making, and not in a much wider sense often used in mainstream institutional literature following 4 Douglass North (1990) and others (i.e., looking at policy capacities as factors on the macro-level political deliberations between different actors – executive, legislative etc – where public policy implementation institutions, or bureaucracies, enter only occasionally and as tools of political deliberations). Thus, we distinguish between different concepts that reveal the political, policy and administrative underpinnings of public policies (based on Painter and Pierre 2005: 2-7; also Karo and Kattel 2010): • The broadest concept can be defined as state capacity, that is, achieving appropriate outcomes such as sustainable economic development and welfare (based on values such as legitimacy, accountability, compliance, consent). In essence, development-policy discourse refers to this when discussing the capacity of the government to implement theoretically sound or ideal-type policies (for a broader critical discussion, see Grindle 1996, 2010). It can also be viewed as the legitimacy and extent of government involvement in a policy area, or the legitimacy (external and self-created) to intervene in private-sector activities through different means available to public authorities. From the perspective of public management this concept can be unpacked by distinguishing two subsidiary concepts that are both preconditions for state capacity. • Policy capacity refers to the ability to make intelligent policy choices (based on values such as coherence, credibility, decisiveness, resoluteness).