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The significance of corporations in the new economy

Published onJul 11, 2022
The significance of corporations in the new economy

My approach to the future of multilateral economic governance is not to look at trade, but to look instead at what companies do. I ask to what extent we can really sustain economic governance, when we have a certain number of companies that do things in a particular way.

Being trained in the Schumpeterian fashion, I suggest that not all companies are equal. If you look at the distributional industries, you will find some companies which are more equal than others. These are companies which develop and apply new technologies, and which form a critical part of the economic fabric.

As usual in wars, the war in Ukraine is showing that raw materials are crucial; and it is also showing how geopolitics very much influences what different companies manage to do in relation to raw materials. But, in the long run, raw materials can be substituted more easily than the competencies associated with core new technologies. The story now is very simple. In the West, the core technologies, (which, by the way, allow us to interact today online), are dominated by a restricted oligopoly of American corporations. These corporations are very much designing the future. Oil is important, for sure. But the core material of our age is data, data processing, information and communication technologies. Those who have an advantage in this area are very likely to dominate the world. And we need to be aware of that.

Of course, such technological advantage is strongly associated with the total amount of effort that countries put into creating new opportunities. One proxy for that quantity of effort is the R&D expenditure that each country can afford. Over the last 20 years, China has made a major jump forward. It is now spending as high a proportion of its GDP on R&D as the European Union; and this means that, in absolute PPP terms, China is now spending more on R&D than the European Union. This should be enough to make us see that we have to face a new challenger. As in relation to trade and to many other economic variables, the total geography of invention and innovation has been redesigned in recent years. We have here to acknowledge the entry of a new player.

Which are the corporations behind this entry of China into the new technologies? For many years, technological leadership has been coming from companies like Samsung, and Volkswagen — though, of course, Volkswagen is active mostly in a traditional industry, motor vehicles, which is more than 100 years old. But now we have started to see Chinese corporations like Huawei, which are strongly investing in R&D. These companies are designing the future — not only in IT but also in the pharmaceutical and biotechnology sector.

The scale of R&D investment by companies can be grasped by comparing it with the scale of public R&D investment in the EU. The EU’s Horizon 2020 programme is a large and very important programme for the European Union; but the total annual investment in this Europe-wide programme is comparable to, or even lower than, what a single company such as Amazon or Alphabet or Microsoft invests annually into the generation of new ideas, new products, new processes and new services. In short, the total amount of resources which the EU is investing in order to compete with American and Chinese companies is not comparable with the total resources being mobilised by the American and Chinese corporations that are developing the core technologies of the future.

One approach, being tried not only by the European Union but also by other countries including China and the United States, is to take mission-oriented actions. This is an approach that was already being advocated by my mentor, Christopher Freeman, at the University of Sussex in the nineties, and which is now being forcefully advanced by Mariana Mazzucato at the University of London. This is important because Europe is now in a situation in which it is challenging an already established oligopoly.

Drawing on the example of the space programme in the United States 30 years ago, Freeman pointed out that we in Europe needed to move in a direction which was more decentralised and more able to involve a plurality of commercial actors. A European strategy , if properly implemented, could have responded to the creation of the American oligopoly of the big techs. Back in 1992, it was not at all clear how this oligopoly was going to be created. Facebook was not there. Microsoft was a small company. Amazon was not there. But there was a concept of companies capable of doing things in the IT and communications space. We in Europe could have fostered that concept. But we failed to do so. The real challengers of the big tech American corporations are now Chinese counterparts, not European counterparts. Nokia, for example, could have been one of the European counterparts challenging at least Apple; but it has not proved able to do so. Unfortunately, in these core sectors, we Europeans do not have anything comparable to the top American or Chinese corporations in the field.

So this is my story — and it leaves us with quite a lot of questions. Do we need to have something more than the external contro which public policy can exert through regulation, or antitrust policies or anything like that? The European Union is very active in regulating data. It imposes a multitude of constraints on what corporations handling data can or cannot do, which is fine. But we do not have any internal control on these corporations, for the simple reasons that the headquarters of these corporations, the top managers and so on, are not directly answerable to the governments of European countries.

An interesting example of an effort to go further is what the European Union is doing with the European Battery Alliance, a widespread diffusion activity, which, hopefully, will lead Europe to be a leader in one of the core sectors of the new technological frontier. And that's fine. But even that perhaps is not enough, unless Europe also manages to move beyond the technology to full-scale production undertaken by European companies.

An example may help to illustrate the extent of change required if Europe wants to create a counterpart to the established American oligopoly, and to the Chinese challengers. My 17-year-old daughter spends a lot of time on TikTok — a social network which, of course, is the only major social network that is not American but is very much attracting the younger generation. It is very possible that, within 20 or 30 years, TikTok might be more important than Facebook, Twitter and Instagram and all the other social networks. So perhaps it's not surprising that when TikTok wanted to enter the United States, the Trump administration not only wanted to make sure that it complied with relevant regulation, but also raised the questions about the effect on US national security, because of its Chinese ownership. Given that TikTok specialises in showing silly videos of teenagers dancing, it is very difficult to understand how TikTok could actually become a problem of national security for the United States. But in the end, this security challenge was what the United States wanted to raise; and it managed to do so.

Two historical tales are also instructive. One is Concorde, the other Airbus. Both of them were ventures strongly supported by European governments. The first started as an Anglo-French venture, the second as a French-German venture. There was one failure and one success. The failure was Concorde; technologically, it was a very spectacular achievement on the part of the two European manufacturers, a very good product; but, commercially, it was a failure; and it didn't last long. The success was Airbus. Airbus was strongly supported by European governments, and by airlines, It caused, as we know, a lot of complaints from member states in the World Trade Organisation, in particular from the US, and it provoked considerable geopolitical discussion. But, at the end of the day, it has been one of the few cases in which genuinely European, publicly supported corporation managed to break into a major market, and somehow even managed to redraw the structure of that market — which, before Airbus, was totally in the hands of a restricted number of American corporations which together constituted an oligopoly comparable to what we see now in the case of the big tech corporations.

Perhaps we should try to learn something from these historical examples, and apply that knowledge to create great European corporations in the emerging industries. But we are not doing so at present. Europe is not challenging. And this is a serious problem for the economy of the 21st century — much more serious than the supply of oil and gas.

Professor Daniele Archibugi

Italian National Research Council and Birkbeck College

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