How can emerging industries secure state support?

Published November 7, 2018

2018-11-07 10:31:41

Railroads, responsible investment and solar panels would never have grown into full-blown industries without initial backing from governments. But how can nascent industries obtain state support? A broad study of the European photovoltaic sector sheds light on the best conditions for a viable sector to emerge alongside strong established rivals.

A popular story in universities and media is that new industries are born and blossom like flowers, purely on the strength of the energy and vision of entrepreneurs. “But the truth is, they need a gardener equipped with tools and water!” quips HEC Professor Rodolphe Durand, who has long worked on how interactions between states and companies shape industries. In the case of emerging new industries, “the gardener” is the state. As Durand points out, the notorious so-called GAFAs emerged “at the intersection of universities and start-ups, with support from both the federal state and the state of California.” Thanks to massive government sponsorship, China was able to foster the growth of its own version of the GAFAs. With only fragmentary state support, Europe has so far failed to do so. It turns out that new industries might not be able to emerge on their own, like wild flowers, after all. “Incumbents enjoy economies of scale, and they have got the networks to distribute their products” – competitive advantages that simply cannot be matched by newcomers without supportive public policy. So how do emerging industries attract state backing?

Light from the photovoltaic industry

Rodolphe Durand et al. were able to shed light on the conditions in which emerging industries come to receive state support by studying the European solar photovoltaic (PV) sector. Solar PV production grew rapidly in the 1990s and 2000s, but it was highly dependent on public incentives. “It would never have taken up unaided, because of the high cost of panels and the need for distribution infrastructures,” Durand explains. Incentives primarily took the form of feed-in tariff (FIT) policies, whereby governments guarantee the purchase of renewable electricity fed into the grid at a particular price, typically for a guaranteed number of years.

“Whatever the new sector, its chances of success in obtaining regulatory support increase with coherence.”

Why did the government decide to invest in FIT policies for these novel technologies? Back then, concerns about global warming and the 1986 Chernobyl accident encouraged mobilization around environmental issues. Regulators attempted to reduce dependency on foreign fossil fuels, and the most commonly cited motivation for FIT policies was to develop a domestic industry. The move was important for future competitiveness, but also came at a cost – both in terms of spending and of potential threat to the established industries and current economic stability.

Durand et al. theorize that two main features determined state support: the nascent industry’s identity and the structure of rival interests. Regulatory aid is unlikely to occur in a vacuum; there must first be an existing, distinct category to nurture and protect the novel industry. Alternative industries are in competition with incumbent industries for state attention, meaning that the power of rival interests probably plays a part.

How a new industry proves itself

As a new industry category emerges, it initially comprises few members and is not immediately seen as a valid field of activity, but as more firms participate and start carving out a market, acceptance grows. In addition, as the number of companies grows, they are more likely to create supportive networks and cultivate social ties, which also increases recognition. Accordingly, policymakers are more likely to endorse what is already showing signs of being accepted as a meaningful and viable sphere of economic activity. But to really gain legitimacy, a novel industry must also be coherent in its identity. For instance, when oil companies such as Shell or BP entered the solar PV industry, their moves (soon labeled “greenwashing”) were perceived as inconsistent with their core businesses and dampened the recognition of the new sector by the state. Indeed, Durand et al. found a significant effect of both category density and coherence in the cross-country data they collected and analyzed. But, again, the wider competitive context also influences the likelihood of regulatory support.

Fighting for turf

The researchers examined the concentration of established industries – here, the dominant, century-old traditional energy sector – and found that a higher concentration of rival interests actually created a more favorable context for nascent industries (whereas one could have expected entrenched companies to capture resources, or even to use their muscle to quash emerging rivals). The main explanation is that neither the state nor the traditional sector perceives the new industry as a threat. For instance, when the German government pioneered feed-in tariffs for solar PV, the coal industry had such a high share of the market that it had little to fear from the emerging industry. In 2000, the total installed capacity of solar PV in Europe was less than 1/1000th of that of the non-renewable energy.

Hardly surprising then, that the technology was just not taken seriously, as one environmental activist told the researchers: “they think it’s so small and just to power a few lightbulbs”. A strong incumbent can also strengthen a new industry’s sense of purpose, as it portrays itself as a clear and convincing alternative. One PV professional interviewed in the study figured that the nuclear power industry, France’s dominant player,“ served as an enemy… and you need an enemy to push an idea forward”. And again, this positive effect of rival interests was stronger when the emerging industry appeared coherent.

Based on an interview with Rodolphe Durand and on his paper “Shine on Me: Industry Coherence and Policy Support for Emerging Industries”, co-written with Panayiotis (Panikos) Georgallis and Glen Dowell (Administrative Science Quarterly, 2018).

Reposted from HEC Paris.

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