Growth through innovation bursts: Why industrial policy should not bet on size

By Giuseppe Berlingieri, Maarten De Ridder, Danial Lashkari and Davide Rigo. Excerpts:

"Industrial policy is back on the agenda across advanced economies, with a growing channelling support towards large incumbent firms on the premise that they are the most capable innovators. This column uses data on French manufacturing firms to argue that this premise deserves scrutiny. Firms become large primarily through occasional, large 'innovation bursts' rather than by innovating at persistently higher rates. The arrival of these bursts involves an element of chance, so a firm's current size says little about how much it will innovate in the future. Policies that entrench the position of incumbents may therefore slow down the churn that sustains aggregate growth."

"This column is not an evaluation of any specific industrial policy programme, and our discussion has abstracted from any strategic and security motives behind much of the current debate. Our results also do not imply that scale is never efficient: some technologies – notably intangible-intensive ones with high fixed and low marginal costs – feature genuine returns to scale and ignoring this would be costly (De Ridder 2019, 2024, Lashkari et al. 2024). Our findings do suggest that policymakers therefore face a trade-off between accommodating such scale effects, and entrenching incumbents whose size reflects the luck of past innovation bursts. An industrial policy that shields incumbents from that displacement risks slowing the growth it aims to promote."