Transatlantic Approaches to Supporting Manufacturing

Executive Summary
Manufacturing matters because it supports R&D on a large scale, critically underpins defense capabilities, and spills over to development of new services. The U.S. and European governments have been pursuing industrial policies for several decades, with noticeably different approaches. The United States emphasizes failure by the private sector to underwrite general scientific research as a reason to provide grants, private-public partnerships, and subsidies. In the EU, the conventional wisdom in favor of public support for industry rests on Europe’s failure to innovate in critical areas of computing, communications, and biotechnology. Europeans also reserve the right to directly aid companies or save them through mergers and bailouts.

Programs in France, Germany, and the UK have variously targeted specific sectors (including nuclear energy, information technology, and biotechnology), science and innovation, and individual companies. Efforts at the EU level focus on creating a more competitive environment in which to invest, rather than specifically targeting manufacturing. More recent attempts aimed to spearhead innovation in high technology through competitive awards of grants and subsidies.

American programs in support of industry have largely involved grants for research. Military applications played a central role during the Cold War in areas such as transportation, telecommunications, and electronics. Within the past few years, Congress has appropriated funds for a National Network for Manufacturing Innovation. These private-public partnerships bring together academia, industry, and government in search of synergies where markets alone underperform. The idea is to create hubs for ideas and creative thinking and bridge the gap between R&D and product development.

It is not clear that the far more robust European efforts achieve policymakers’ goals. Europe lagged behind the United States in productivity levels throughout the 1950s and 1960s—and continues to lag today. Likewise, American companies dominate cutting-edge technologies, such as computing, software, communications, and biotechnology, but it’s hard to ascribe these successes to specific U.S. policies. Attitudes in Europe are changing, with waning support for national champions and incumbents’ rights; the virtues of competition seem to gain ground at both the national and EU levels.

Manufacturing no longer accounts for a predominant share of economic activity on either side of the Atlantic. Over the past six decades, value-added created by manufacturers fell from a quarter of GDP to about half that in the United States, the UK, and France. In Germany, the share of industry declined from 34% to 24% (Figure 1).

Figure 1 – Share of Manufacturing in the Total Economy

Source(s): World Bank and MAPI

One way in which the industry distinguishes itself is its disproportionate share of overall research and development spending; manufacturing thus employs an army of scientists and engineers. In the United States, the sector spends about 70% more on R&D than nonmanufacturing sectors.Facts About Modern Manufacturing, MAPI and The Manufacturing Institute, 2013, Manufacturing also critically supports a country’s military hardware that, for security reasons, ought to be made domestically for the most part.

About 50% of total exports are merchandise, which is important because export receipts largely finance imports, contributing to a stable external payments position. Manufacturing also tends to spin off services, in turn expanding the overall economic pie of a nation. Data amply document a steady premium that manufacturing wages command over those of other sectors.

Given these factors, governments are paying attention to manufacturing, with resulting industrial policies pursued to various degrees all around the world. “Industrial policy” can be defined as any set of government-enacted measures that seeks to shape manufacturing. Measures may target the economy as a whole, all industrial sectors, chosen subsectors, or individual companies.

This report takes a closer look at how Europe and the United States approach policies supporting manufacturing over the past several decades. The spotlight is on three large EU economies—France, Germany, and the UK—and the European Union, with the U.S. serving as a background.

European vs. U.S. Approaches
Many of Europe’s current attempts to aid its industry stem from a shifting balance of power. The challenge of China’s industrial growth has convinced European policymakers that the future of the continent’s industry lies in higher-value chains of innovation. The reasoning is that only through the development of knowledge-intensive technologies can manufacturing be saved, and if the private sector struggles to innovate, governments have an obligation to step in with funding. Governments accept that some companies are risk-averse, others underspend on R&D, and others simply don’t know what the ideas of the future are. Europeans reserve the right to purchase companies whole or in part in order to save them through mergers and bailouts.

Approaches to saving manufacturing differ across the continent. A typical word used in France to describe the decline of manufacturing is délocalisation, and in Germany, deindustrialisierung. The former implies a loss of the domestic production base that has been displaced elsewhere while the latter points toward a falling share of industry in an economy. These nuanced differences matter when choosing policies.

The French approach to industrial policy is articulated well in this statement from an influential proposal made in 2005:

Financial assistance directed at the new sectors is nonetheless essential for kicking off industrial innovation. We have in mind here putting in place a right coordination between public research and research done by the corporate sector so as to aid the latter. We ought to indemnify the risks to which companies are exposed. These risks are inherent in all innovation activity. However, these risks are reinforced by the large volume of sunk investment and they are aggravated by macroeconomic instability.The Beffa ReportPour une nouvelle politique industrielle, 2005, translation by the author.

If the French prefer direct intervention and public spending, the Germans stress competitiveness and competition as drivers of industrial strength. This recommendation from an influential economic think tank in Cologne lays it out well:

Improving industrial competitiveness … is mainly the task of businesses. … This necessitates not only increasing cost efficiency and staying ahead of competitors by innovating and upgrading, but also requires EU industry to better differentiate and adapt their product portfolios in accordance with changing demand patterns. … more enterprises in the EU should actively use the success factors offered by … industry-service integration, internationalisation (exports, global sourcing and international production) and R&D activities.Industry as a growth engine in the global economyIW Köln, 2013.

Industrial policy in the United States, to the extent that it can be classified as a unified process, tends to bring out the gravitas of manufacturing. This statement by noted economists summarizes the conventional wisdom well:

We agree with those who think manufacturing is important, but we do not agree that this justifies special treatment for the sector, such as special tax rates or other subsidies. Such policies are hard to enforce and an initiation to arbitrageurs who seek ways to capture the gains from such subsidies with little or no actual change in real behavior. Martin Baily and Barry Bosworth, "US Manufacturing: Understanding Its Past and Its Potential Future," Journal of Economic Perspectives 28, No. 1 (Winter 2014): 3-26,

Instead, these economists and other policymakers recommend making the U.S. an attractive place to operate a business, manufacturing or not.

Others point out the changing nature of manufacturing, citing differences between modern/advanced manufacturing and traditional manufacturing. Under the old model, governments funded basic research as a public good, with private companies using the resulting research as inputs into proprietary technologies and products. In the world of advanced manufacturing, the private sector may fail to produce proof-of-concept research that would establish standards around technology platforms. Where such market failure exists, governments can intervene in a more direct and targeted way.Gregory Tassey, "Competing in Advanced Manufacturing: The Need for Improved Growth Models and Policies," Journal of Economic Perspectives 28, no. 1 (Winter 2014): 27-48, The recently launched National Network of Manufacturing Innovation seems to respond directly to this concern.

If Europeans use words such as “relocation” and “deindustrialization,” Americans prefer “outsourcing.” The term suggests a deeper international division of labor through cross-border capital flows and sharing manufacturing processes with outside suppliers. Companies integrate internationally by investing in other companies, greenfield projects, or tighter supplier relationships. Outsourcing refers to the latter. Put another way, outsourcing is a management issue and not a policy issue. The U.S. government does not take a normative position on how private companies choose to set up and run their operations. This does not mean that the U.S. eschews industrial policy as such—rather, if the government does step in, its motivation is to provide public goods rather than pick winners.

Auto Sector Bailouts
An interesting exception to this stylized view was provided by French and American government bailouts of their respective auto sectors. Yet even here, differences between the two approaches speak volumes about the divergent philosophies of industrial policy across the Atlantic.

In France, the 2009 and 2012 bailouts of Renault and Peugeot-Citroën—two large domestic car manufacturers—totaled about $13 billion in soft loans. In return, the state demanded that the companies restrict domestic layoffs and that no domestic plants be closed. The underlying rationale for the aid was less to force restructuring and hike efficiency but more to stem the rise of joblessness and preserve the status quo. The latter bailout also required that the carmakers not pay out dividends or purchase back their shares. The government requested a seat on the board of directors and asked for a representative of trade unions to obtain one as well.

By contrast, the U.S. bailout of General Motors and Chrysler in 2009 involved purchases of preferred shares by the government worth $80 billion. Under new management and heavy oversight by the new owner, GM had agreed to lay off almost 50,000 workers, shut down five plants, and eliminate several car models. Chrysler was forced to shed 3,000 positions, downsize capacity at an existing factory, and discontinue three car models. The government subsequently sold its equity stakes at a profit.

If the French treated their rescued industry with kid gloves, the U.S. took the tough love route. Whereas the French protected their domestic capacity, the Americans chose to downsize the sector. If the French sacrificed the bottom line to keep up volumes, the Americans preferred a healthy bottom line to maintaining production levels. In the end, the two governments did think alike in at least one respect: they both thought it necessary to stimulate demand for cars. On both sides of the Atlantic, car buyers were showered with financial incentives to junk older models in return for rebates on purchases of new vehicles.

Industrial Policies in the United States
Industrial policy in the United States historically involved mostly public spending on basic and applied research. The government has rarely considered supplanting private business in picking technologies, sectors, or direction of innovation. Especially during World War II, the administration stepped in to support research, development, and manufacture of ordnance, hardware, and new military technologies in a more direct way. Following the war, the effort continued with the onset of the Cold War. The government midwifed Project RAND (the name is an abbreviation of “research and development”), which took off in 1948. The entity was a typical vehicle of its time to drive publicly funded innovation. It incorporated as a nonprofit and focused on scientific and charitable aims while largely supporting national security. Initial fields of study included mathematics, engineering, aerodynamics, physics, chemistry, economics, and psychology.

New technologies absorbed by the military inevitably seeped into commercial applications. With time, consumer-oriented spinoffs assumed lives of their own, often outstripping demand for original military gear. When the Cold War fizzled in the late eighties, the government’s support for R&D waned as well. Whereas about two-thirds of domestic research and development was financed by federal money during the Cold War (for the most part in support of national defense), it’s now only about one-third.Kenneth Flamm, "Post-Cold War Policy and the U.S. Defense Industrial Base," The Bridge (Spring 2005): 5-12, National Academy of Engineering,

Aside from just a few sectors, among them aeronautics and shipbuilding, the share of domestic military demand in total industrial value-added produced in the U.S. today is much smaller than it was over the decades of the Cold War. On the other hand, manufacturers of military gear have done rather well, offsetting this fall in captive demand with foreign orders. The one industrial sector that currently matters to national defense a great deal is electronics and its various derivatives, as military gear incorporates vast electronics componentry for accuracy and communications.

The most recent industrial initiative that rivals previous policy efforts in scope and that comes anywhere close to European heft is the Manufacturing Innovation Institutes. Within a National Network for Manufacturing Innovation, these entities combine private and public monies and bring together academia, industry, and government in search of synergies where markets alone underperform. The idea is to create hubs for ideas and creative thinking and bridge the gap between the R&D and product development stages.

Other notable American programs:

  • The National Additive Manufacturing Innovation Institute was established in 2012 in Youngstown, Ohio with $30 million in seed money from the federal government. It counts 95 members, including manufacturers, universities, community colleges, and nonprofit organizations. The focus is on 3D printing and collaboration in blending design with new materials, worker training, etc.
  • The recently created Next Generation Power Electronics National Manufacturing Innovation Institute is housed at North Carolina State University in Raleigh. The initial investment of $70 million was matched by two dozen members, whose interests lie in high-power electronic chips that one day might supplant silicon-based electronics.
  • The Digital Manufacturing and Design Innovation Institute is headquartered in Chicago and led by UI Labs. More than 70 universities, corporations, nonprofit organizations, and other research institutes banded together, contributing more than $70 million in seed money after the federal government made an initial grant of that amount. The program’s spotlight is on supply chain and logistics synergies, design, testing, and prototype efficiency, spanning multiple sectors.
  • The Lightweight and Modern Metals Manufacturing Innovation Institute is tasked with bringing new alloys into existing technologies. It is located in the Detroit area and stationed at EWI, an engineering and technology nonprofit. The consortium of 60 members unites metals manufacturers with labs and universities; the seed funding of $70 million sourced from the federal government was matched by the private sector. With an eye on nearby vehicles manufacturing, the institute explores turbines, aeronautics, and medical implements, aiming to reduce manufacturing and energy costs.


Industrial Policies in Europe
Table 1 lists selected programs and institutions established over the past several decades in support of industry in Europe. The Max Planck Society and CNRS are large multidisciplinary research shops founded before World War II by Germany and France, respectively. They resemble most closely federal support for science in the United States, such as RAND or the National Institutes of Health. All the others in Table 1 reflect focused efforts to actively aid chosen industrial sectors, technologies in vogue, or national champions. Some serve as “convalescence wards” for ailing companies while others subsidize fundamental and applied research with the explicit goal of aiding industry.

Table 1 – Selected Industrial Policy Initiatives in the European Union

Source(s): MAPI

During the fifties through the seventies, France, Germany, and the UK devised multiple programs targeting specific markets and technologies. The devastation of World War II concentrated the minds of policymakers around restoring corporate performance through targeted interventions.

The Commissariat à l’Énergie Atomique (Atomic Energy Commission) and the UK’s Atomic Energy Authority developed civilian nuclear applications. Interestingly, the two nuclear programs diverged with the passage of time. The French effort expanded gradually into research, manufacturing, high-tech components, seismology, computers, etc. It owns Areva, a large nuclear energy producer. By contrast, the UK Atomic Energy Authority narrowed the scope of its work as it transferred both the civilian and defense nuclear activities to the private sector; it now focuses on nuclear fusion.

The European Coal and Steel Community created a common market for the two commodities. Ironically, it restricted competition along the way in order to smooth cross-border animosities still lingering years after the war. The European Atomic Energy Community did the same for atomic energy at the EU level. It also served as a clearinghouse for nuclear power and a vendor of excess power to third parties. It is currently developing the fusion reactor.

The Centre National d’Études Spatiales and the European Space Research Organisation managed and funded space exploration at the French and European levels, respectively. The latter shifted into telecommunications and earth observation, thus supporting indirectly commercial applications of space technologies.

The National Economic Development Office and the Industrial Reorganisation Corporation typified British approaches to industrial policy during the sixties and seventies. The former brought together corporate management, trade unions, and government to devise mutually supportive policies to reverse the economic decline of the times. The latter provided finance to and took direct stakes in private companies and brokered mergers between ailing private companies deemed “strategically important” to the UK. Both embodied high-water marks of British interventionism and were relatively short-lived.

The Europeans couldn’t help but notice the lead the United States developed decades earlier in technology. From business machines to biotechnology, U.S. business ran ahead of what the old continent could muster. The answer was the Plan Calcul and OSEO in France, the Data Processing Program in Germany, and the National Enterprise Board in the UK. All four threw money at creating European competitors to IBM and GE and all failed. Whether investing in small or large entities, the government-nurtured ventures suffered from administrative overload and lack of creativity compared with the sixth sense seemingly natural to private entrepreneurs.

The EU—and France, Germany, and the UK in particular—made vigorous efforts to finance basic research during this time. The immediate after-war period saw significant money expended on fundamental and applied R&D. With the Fraunhofer Society in Germany, the Centre National de la Recherche Scientifique in France, and the PREST Committee and the European Cooperation in Science and Technology at the EU level, Europeans realized early that scientific research was a public good. While essential to private innovation, it nonetheless stood little chance of being underwritten on a large scale by private money.

As failures of programs specifically targeting sectors, companies, and technologies piled up, governments began to ditch hands-on platforms in favor of creating environments that broadly supported business development, investment, and enterprise creation. If governments couldn’t micromanage, at least they could do something to elevate the business climate for all firms. This transition took place in the late seventies and eighties. It coincided with long reigns of pro-business political administrations elected in all three countries. At the same time, the EU Commission independently developed single-market ideas that reinforced national reforms at an EU level.

The results were the Single European Act at the EU level and national economic reforms in individual countries. The latter lowered taxes and simplified regulatory regimes while the former broke barriers to cross-border trade, investment, and flows of capital. They were supplemented by continued funding for research in new technologies. On the EU side, these included EUREKAResearch into Advanced Communications for EuropeESPRIT, and the Joint Technology Initiative. The Europeans desperately sought to achieve with public funding what private enterprise hadn’t: state-of-the-art technologies around which novel applications would emerge.

While the payoff to these ventures is difficult to assess, other initiatives expressly failed to deliver and eventually folded. BioRegio injected monies into biotech regional competitions and startups in Germany but did not move the needle on sectoral performance. The Neuer Markt was a high-tech, high-risk offshoot of the Deutsche Börse (a Frankfurt Stock Exchange). Imitating NASDAQ, it aimed to simplify capital raising for startups. Launched in 1997, it folded six years and several scandals later over financial irregularities of the freshly listed companies.

As Europe became more eager to speed up innovation, it drafted an ambitious program to make the EU “the most competitive and dynamic knowledge-based economy in the world” by 2010. Launched in 2000 under the brand of Lisbon Agenda, the strategy consisted of normative benchmarks and targets around innovation, the “learning economy,” and social renewal. It depended almost exclusively upon national policies. Unfortunately, the latter could not independently deliver the change that otherwise requires decades of shifts in tastes, education, politics, and business practices.

It appears that within the past decade the three countries have come full circle and embraced anew direct financial assistance to companies and sectors.

The High-Tech Strategy 2020 is a German government vehicle that aims “to create lead markets, intensify cooperation between science and industry, and continue to improve the general conditions for innovation.” It picks concrete processes, possible applications of existing products to new needs, and social change that the authorities deem desirable. Examples encompass treating illnesses more effectively with the help of individualized medicine, better health through an optimized diet, living an independent life well into old age, and increasing internet use whilst making it less energy-consuming. This program has all the hallmarks of wishful thinking and picking winners based on popular voting rather than objective evidence of market failure.

The Agence de l’innovation industrielle was a short-lived French attempt to support industrial innovation carried out by large companies. It spent money on projects such as an alternative to Google’s search engine, satellite TV streamed to HD smartphones, and hybrid diesel engines. Virtually all monies went to very large manufacturing companies and were sourced from the government’s sale of the state’s equity stakes in the private sector. The program effectively swapped public money tied in corporate ownership into public research expenditures managed by the private sector. After failing to show much for its €1.5 billion in disbursements, the program merged with OSEO and has subsequently been taking equity stakes in small companies.

The UK’s Regional Growth Fund and Strategic Investment Fund focus on funding new technologies, mostly through equity stakes in companies and projects. The British initiatives pick winners in high-risk areas that nonetheless promise a potentially high social return. Examples include printable electronics, low-carbon energy, and dissemination of high-speed broadband. According to a recent progress report, however, most monies allocated to the Regional Growth Fund remain undisbursed. This is in line with other evidence that paints a dark picture of hands-on industrial policy: if it is difficult to earn a decent return on public funding of private-sector innovation, it is even harder to select the recipients of funding in the first place.

Relative to the United States, Europe pursued more muscular industrial policies after World War II. European efforts involved more institutional platforms, a larger purse, and a firmer grip by the state. A few reasons explain this divergence.

First, a greater European effort can be traced to a persistent economic performance gap between the two markets. As Figure 2 shows, Europe lagged behind the United States in productivity levels throughout the 1950s and 1960s. American companies dominated cutting-edge technologies of the time, such as computing, aerospace, and communications.

Figure 2 – Productivity in the Total Economy

Source(s): The Conference Board and MAPI

Broadly speaking, U.S. manufacturing’s higher productivity relates to idiosyncrasies of the nation’s business culture. American companies are born and die with relative ease, they compete more assiduously, and their executives are welcoming to novel ideas in management and technology. If the European marketplace does underperform in these areas, it is difficult to see how industrial policies alone can rectify the situation. The proliferation of ideas about the next winning strategy suggests that policymakers in Europe see them as quick fixes to long-term structural problems.

Second, many (though not all) European policymakers believe the state can pick winners simply because it possesses knowledge that the private sector lacks. The opposite view drives policies in the United States. As noted by a French economist whose voice is influential in government cycles, “The sovereign state creates the means of accumulation of scientific and financial resources. It provides future national champions with grants, secure markets through public procurement policies, and prevents foreign entry.”Elie Cohen, "France: national champions in search of a mission," in Industrial Enterprise and European Integration, ed. Jack Hayward (Oxford: Oxford University Press, 1995).

It is hard to gauge the success of national champions. Oftentimes they are extensions of the state with captive demand. Examples include nuclear energy and fast train technologies in France. Making sense of profits is further clouded by accounting rules that may underprice public costs. Nurturing national champions has been less prevalent in Britain than in France and Italy—and even less so in Germany and Scandinavia over the past few decades. What is more, sentiment may be shifting away from support for national champions at the EU level."Sectoral intervention should promote competition between firms for access to public support, and should not involve clauses that automatically favour incumbents." Bruegel Policy Brief, June 2011,

Third, policies in Europe are often devised under pressure from vested interests—something that observers of Washington’s politics would readily recognize. Labor unions and left-of-center political parties have always been keen to safeguard jobs in sunset sectors, such as autos, steel, mining, and shipbuilding. The case of failing French automakers is illustrative. Competition rules or efficiency metrics take a back seat to notions such as ring-fencing “national” technology, retaining strategic assets, and keeping foreign capital out.

In the end, it is not clear that Europe has received its money’s worth. The share of manufacturing in the total economy at constant prices stayed put at around 17% in the U.S. since 1950 (Figure 3). It ended up at roughly the same level in major European economies after several dozen industrial programs and billions of euros. If employment was the guiding principle for European policymakers, then the outcomes appear meager, too. Manufacturing employment as a percentage of total employment fell between 1995 and 2012 in European countries with the largest industrial sectors (Figure 4). Manufacturing productivity rose at an annual compound rate of 4.2% between 1979 and 2011 in the United States compared with 3.4%, 3.2%, and 2.5% in the UK, France, and Germany, respectively (Figure 5). Whereas in the seventies and eighties the productivity gap between the U.S. and Europe narrowed, it has widened since then.

What holds equally true in the United States and Europe is that the future of manufacturing lies in making an economy attractive for locating industrial plants. Simple taxation rules, a highly educated workforce, low input costs, and quality infrastructure all play crucial roles.

Figure 3 – Share of Manufacturing in Total Economy (Constant Prices)

Source(s): Groningen Growth and Development Centre and MAPI

Figure 4 – Industry Employment as a Percent of Total Employment

Source(s): Eurostat and MAPI

Figure 5 – Output Per Hour, Average Annual Compound Rate of Change, 1979-2011

Source(s): U.S. Bureau of Labor Statistics and MAPI

InvestmentKaryn Hill