VERTICAL RELATIONS BETWEEN FIRMS AND INDUSTRIAL-POLICY

The goal is to put recent industrial policy debates into a somewhat wider perspective by developing a neglected argument about the design of industrial policy: that problems of technological stagnation are not always caused by the production of "too few' innovations so much as they are caused by problems associated with a too limited use of innovations. It follows from this that policies applied to innovation producing industries ("horizontal strategies' hereafter) may not be as efficacious as those applied to upstream supplier or to downstream user industries ("vertical strategies' hereafter). We start by reviewing the classic arguments (and recent evidence) about market failure and R&D. We shall argue that our observations are consistent with a considerable body of empirical evidence about the determinants of successful innovations, and they imply that vertical strategies are often rather more attractive than horizontal ones for those interested in the design of policies to stimulate innovation. We close the essay with a few speculations on policy options associated with the use of vertical strategies. -from Author