Why the United States Needs Government-Supported Innovation

Professor Chatterji says national security concerns, supply chain resiliency and climate transition are driving American industrial policy

April 16, 2024
Energy & Environment, Innovation

Industrial policy, or using government funds to spur homegrown innovation, has been a feature of most countries’ economic playbooks for decades.

But in the U.S., government support for critical national industries fell out of fashion in the 1990s, said Professor Aaron “Ronnie” Chatterji of Duke University’s Fuqua School of Business.

“People would say, ‘how can we trust the government to pick winners and losers, and decide which firms get the money and which don’t?’” Chatterji said in a talk on Fuqua’s LinkedIn page.

But two major pieces of U.S. legislation, the Inflation Reduction Act and the Chips and Science Act, led some scholars and lawmakers to see the beginning of a new era for U.S. industrial policy—spurred by the convergence of a post-pandemic reckoning about the fragility of global supply chains and a growing geopolitical concern about reliance on foreign countries for critical industrial components.

As the White House Chips Act coordinator, Chatterji has supervised the implementation of more than $52 billion invested by the U.S. government to jump-start the semiconductor industry in the U.S.

Semiconductors—the components of chips—are increasingly crucial for many industries and products, Chatterji said. He pointed out spiking car prices in 2021 and 2022, when pandemic-era bottlenecks in the supply chains led to chip shortages.

“Automobiles, like a lot of other products, are increasingly computerized,” Chatterji said. “From monitoring the tire pressure, to the inverter for the engine, they all depend on chips.”

The need to build resilient supply chains has prompted support for the Chips and Science legislation in the U.S., Chatterji said, in a bipartisan effort coalesced around national security concerns.

“A lot of the goods that we rely on each and every day come from China,” he said. “Not only manufactured goods, but also industries that are really sensitive for national security.”

Computer chips have a wide use in defense systems, he said. “If those are not manufactured in the U.S., it can be a vulnerability for our national security.”

The risks of industrial policy

In a perfect world, Chatterji said, free markets should allocate resources to industries and products with the potential to grow sustainably in the future.

The risk of governments picking winners and losers is that if the businesses don’t develop a sustainable business model, they may become permanently dependent on the government money, he said.

“There are going to be mistakes,” Chatterji said, pointing to the often mentioned example of Solyndra, the failed government-supported solar energy company.

In order to judge the effectiveness of these policies, he said, we should look at them in terms of portfolios.

“People may focus on Solyndra. But that was part of a broader portfolio that included companies like Tesla, which also received support,” he said.

He also mentioned that to reduce the risks of supporting the wrong project, industrial policy needs to pass “the market test.”

“Keep watching whether the private capital is matching public sector money,” he said. “When industrial policy fails, it is often because governments invest in things that don’t have a strong business case.”

How the new industrial policy is affecting the U.S.

“Right now, we are seeing more than $688 billion of private sector investment in areas like batteries, chips, and electric vehicles here in the United States,” Chatterji said.

For a long time, the private sector wouldn't look at the semiconductor industry because the economics were uncertain, he said. “But once you have these incentives, you change the calculus.”

This is the way industrial policy is supposed to function, he said. “The government lays the foundation by providing tax credits, incentives or other kinds of support for industry. But it is the ability to attract private capital that makes industrial policy work.”

In North Carolina, for example, the last three years have seen a massive investment in battery production and in the processing of lithium, one of the most important inputs in the EV supply chain. Companies have also announced projects to build EV vehicle factories in the state, he said.

Some critics argue that some of these investments might have happened anyway, even without government interventions, Chatterji said.

“Some would have surely happened even without tax credits. But some companies have cited the Inflation Reduction Act incentives, when they made the decisions to locate here in North Carolina.”

The importance of communication and transparency

Along with the business case for industrial policy, transparency in the process is also essential to give everyone confidence that the money doesn’t get distributed to “politically connected firms, or people who are big donors to campaigns or who live in the right states,” Chatterji said.

For example, the U.S. administration has created an “Investing in America” website that maps where the investments are funneled, he said.

He also mentioned the importance for policymakers to go around the country, with webinars, meetings and events, to make sure everybody understands how to apply, and what tax credits and grants are available.

One common concern is whether such incentives will survive future administrations, Chatterji said.

“Business hates uncertainty,” he said.

However, he predicts the U.S. will see continued support for policies that can be viewed as strengthening national security.

“The Chips and Science Act was an example of bipartisanship because chips are important for national security,” Chatterji said. “When it comes to U.S. leadership on key technologies, everybody agrees these are our national priorities and not necessarily partisan policies.”


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