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Industrialpoliciesfor
thetwenty-firstcentury
LessonsfromtheUnitedStates
WilliamB.Bonvillian
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ProjectDocuments
Industrialpoliciesforthetwenty-firstcentury
LessonsfromtheUnitedStates
WilliamB.Bonvillian
ThisdocumentwaspreparedbyWilliamB.Bonvillian,LecturerinthePoliticalScienceDepartmentandtheScience,TechnologyandSocietyDepartmentattheMassachusettsInstituteofTechnology,andSeniorDirectorforSpecialProjectsintheOfficeofDigitalLearningofthesameInstitute.Itispartoftheactivitiesofthe“Recoverbetter:overcomingtheconsequencesoftheCOVID-19pandemicinLatinAmericaandtheCaribbean”projectwithintheframeworkofthecooperationprogrammebetweentheEconomicCommissionforLatinAmericaandtheCaribbean(ECLAC)andDeutscheGesellschaftfürInternationaleZusammenarbeit(GIZ),financedbytheFederalMinistryofEconomicCooperationandDevelopment(BMZ)ofGermany.
ThedocumentwaspreparedunderthesupervisionofAndreaLaplane,EconomicAffairsOfficer,andNunziaSaporito,EconomicAffairsOfficer,bothoftheDivisionofProduction,ProductivityandManagementofECLAC,andunderthecoordinationofCeciliaPlottier,SeniorEconomicAffairsOfficerofthesameDivision.
TheUnitedNationsandthecountriesitrepresentsassumenoresponsibilityforthecontentoflinkstoexternalsitesinthispublication.
MentionofanyfirmnamesandcommercialproductsorservicesdoesnotimplyendorsementbytheUnitedNationsorthecountriesitrepresents.
Theviewsexpressedinthisdocument,whichhasbeenreproducedwithoutformalediting,arethoseoftheauthoranddonotnecessarilyreflecttheviewsoftheOrganizationorthecountriesitrepresents.
UnitedNationspublication
LC/TS.2024/13
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Copyright©UnitedNations,2024
Allrightsreserved
PrintedatUnitedNations,Santiago
S.2400004[E]
Thispublicationshouldbecitedas:W.B.Bonvillian,“Industrialpoliciesforthetwenty-firstcentury:lessonsfromtheUnitedStates”,ProjectDocuments(LC/TS.2024/13),Santiago,EconomicCommissionforLatinAmericaandtheCaribbean(ECLAC),2024.
ApplicationsforauthorizationtoreproducethisworkinwholeorinpartshouldbesenttotheEconomicCommissionforLatinAmericaandtheCaribbean(ECLAC),DocumentsandPublicationsDivision,publicaciones.cepal@.MemberStatesandtheirgovernmentalinstitutionsmayreproducethisworkwithoutpriorauthorization,butarerequestedtomentionthesourceandtoinformECLACofsuchreproduction.
ECLACIndustrialpoliciesforthetwenty-firstcentury...3
Contents
Introduction 7
I.TheUnitedStateshistoricalcontext 11
A.Post-WorldWarIIdevelopments 12
B.PositionofUnitedStatesmainstreameconomics 12
II.Definingindustrialpolicy 15
A.Thedebateoversocialgoalsforindustrialpolicy 15
B.Industrialeconomicpolicyversusindustrialinnovationpolicy 16
III.PriorUnitedStatesindustrialinnovationpolicies 19
A.Fourperiodsofindustrialinnovationpolicies 19
B.Remainingchallengesinenergyandmanufacturing 20
C.Overallpoints 22
IV.ThedrivingforcesbehindtheUnitedStatesnewpolicies 23
A.Thepandemic 23
B.Climatechange 24
C.China’stechnologicaladvance 24
V.UnitedStatesindustrialinnovationpoliciesinthe2020-2022period
andtheirunderlyingapproaches 25
A.Top-downapproach 25
B.Bottom-upapproach 29
C.Demonstrationprojectapproach 32
D.Directproductionsupportapproach 33
E.Supplychainapproach 35
F.Couplingbasicandappliedresearchapproach 36
G.Regionalimplementationapproach 39
H.Summingup 40
ECLACIndustrialpoliciesforthetwenty-firstcentury...4
VI.ThenewinfrastructurerequiredforUnitedStatesindustrialinnovationpolicies 41
A.Organizationalinfrastructure 41
1.Crossagencycoordination 41
2.Linkingappliedtobasicresearchefforts 42
3.Integrationbetweenagencies,industry,anduniversities 43
4.Trainingchangeagentsskilledinprojectmanagementnotjustresearch 43
5.Workforceeducationforthetechnicalworkforce 44
6.Technologycertificationandvalidation 45
B.Scale-upinfrastructure 45
1.Adoptionofadvancedmanufacturing 45
2.Technologytestinganddemonstration 45
3.Scale-upfinancing 46
4.Procurement 46
5.Mappingsupplychainsandfillingthegaps 46
C.Evaluationinfrastructure 47
VII.SummaryofthenewUnitedStatesindustrialinnovationpolicies 49
VIII.Thetop-five:lessonsfromUnitedStatesapproachestoindustrialinnovation
policypotentiallyrelevanttoLatinAmericanandCaribbeannations 51
A.Thefivemostrelevantapproaches 51
1.Spurregionalinnovation 52
2.Offerscale-upfinancing 53
3.Promoteadvancedmanufacturing 53
4.Supportworkforceeducation 54
5.Consider“topdown”and“bottomup”approaches 55
Bibliography 57
ECLACIndustrialpoliciesforthetwenty-firstcentury...5
ListofAcronyms
ARPA-E
AdvancedResearchProjectsAgency-Energy
ATP
AdvancedTechnologyProgram
CCS
CombinedChargingSystem
CDC
CenterforDiseaseControl
CHIPS
CreatingHelpfulIncentivestoProduceSemiconductors
CTAP
CoronavirusTreatmentAccelerationProgram
DARPA
DefenseAdvancedResearchProjectsAgency
DEI
Diversityequityandinclusionforminoritiesandwomen
DOD
DepartmentofDefense
DOE
DepartmentofEnergy
EDA
CommerceDepartment’sEconomicDevelopmentAdministration
ESGC
DOE’sEnergyStorageGrandChallenge
EU
EuropeanUnion
EUA
EmergencyUseApproval
EV
Electricvehicles
EXIM
ExportImport
FCAB
FederalConsortiumforAdvancedBatteries
FDA
FoodandDrugAdministration
HDI
HumanDevelopmentIndex
HHS
DepartmentofHealthandHumanServices
IMF
InternationalMonetaryFund
MEP
ManufacturingExtensionPartnershipprogram
NASA
NationalAeronauticsandSpaceAdministration
NIH
NationalInstitutesofHealth
NIST
NationalInstituteofStandardsandTechnology
NSF
NationalScienceFoundation
NSTC
NationalScienceandTechnologyCouncil
OSTP
WhiteHouseOfficeofScienceandTechnologyPolicy
OTA
OtherTransactionsAuthority
OWS
OperationWarpSpeed
PPP
Publicprivatepartnership
R&D
ResearchandDevelopment
SBIR
SmallBusinessInnovationandResearchProgram
STEM
Science,Technology,EngineeringandMathematics
TRL
TechnologyReadinessLevels
UN
UnitedNations
US
UnitedStates
ECLACIndustrialpoliciesforthetwenty-firstcentury...7
Introduction
DuringtheCovid-19pandemicperiodof2020-2022,theworldwitnessedarevivalofactiviststateeconomicpoliciesinmanynations,throughattemptstosecuremedicalsuppliesanddeveloptherapies,aswellastooffsettheeconomicdropcausedbythepandemic.
1
Asthepandemicrecededtowardendemicstatus,manystatespursuedeconomicrecoverystrategiesthatcontinuedinterventionistpoliciesusedduringtheheightofthepandemicandwerebasedonindustrialpolicies.Thesenewapproacheshavemovedbeyondtraditionalrationalesofseekingproductivityandcompetitivenessgainstoembracedevelopmentofcapabilitiesininnovation-basedgrowth.
Thesegrowthpoliciesarebasedondeliberategovernmentalinterventionsinpost-researchstagesofinnovation.Thepoliciesrelyonimprovingtechnologicalknowledgeandcapabilitiestoenableproductionsystemstoadoptnewtechnologiesandexpandqualityjobs,andtobuildresiliencethroughsupplychainstorespondtofuturecrises,aswellastomeetsustainabilitydemands.Newformsofinnovationorganizationarerequiredandunderwayatsubstantialscaletomanagethenewprograms.Collectively,becausethesepoliciesarefocusedonfosteringinnovation,theycanbetermed“industrialinnovationpolicies.”Althoughdifferentnationsareattemptingdifferentapproaches,ananalysisofinternationalpracticescanprovideusefullessonsforLatinAmericanandCaribbeancountries.
ThepaperthereforeattemptstoevaluatenewindustrialinnovationpolicyapproachesintheUnitedStates(U.S.).Historically,theU.S.hasresistedsuchgovernmentalinterventionsinitsinnovationsystem.ButtheU.S.inthe2020-2022periodhasembarkedonasetofmajorindustrialinnovationpolicyapproachestoimproveitstechnologicalinnovationsystem,whichareexploredhere.
Thedocumentisstructuredintoeightsectionsinadditiontothisintroduction,therestofwhichaddressestheimportanceofindustrialpoliciesfordevelopingcountries.ThefirstsectionprovidesanhistoricaloverviewofindustrialpoliciesintheUnitedStates.Thesecondsectionexaminesthedefinitions
1Theviewsexpressedinthispaperaresolelythoseoftheauthorandnotnecessarilypositionsofhisemployer,MIT.
ECLACIndustrialpoliciesforthetwenty-firstcentury...8
ofindustrialpolicyandthedebateonitsobjectivesandhighlightsthenotionofindustrialinnovationpolicy.ThethirdsectionpresentsthehistoricalprecedentsforindustrialinnovationpoliciesintheU.S.Thefourthsectiondescribesthedrivingforcesbehindtheresurgenceofindustrialpolicyinthecountry,inaqualityandquantityneverexperiencedbefore.ThefifthsectionanalyzessevenindustrialinnovationpolicyapproachesunderlyingrecentinitiativesintheU.S.inthe2020-2022period.Sectionsixlooksattheinstitutionalinfrastructurethatneedstoco-evolvewiththenewindustrialinnovationpolicyimpetusforittowork.Theseventhsectionsummarizesthesenewpoliciesandapproaches,andthensectioneightdiscussesfivemainlessonsforLatinAmericanandCaribbeancountriesandconcludes.
A.Relevanceofindustrialpoliciestodevelopingnations
Aresuchindustrialinnovationpoliciesrelevanttodevelopingcountries?TheUnitedNations(UN)hasdefineddevelopingcountriesasthosewitharelativelylimitedstandardofliving,anundevelopedindustrialbase,andamoderatetolowrankingontheHumanDevelopmentIndex(HDI),developedbytheUNin1993asacomparativemeasureofpoverty,literacy,education,lifeexpectancy,andrelatedfactors.
Industrialpolicyhaslongbeenacontentiousideaineconomics,arisinginrecentdecadesdespiteabackdropofneoliberaleconomicviewsdatingfromtheearly20thcenturybutdominantstartinginthe1960sandfavoringfreemarketsandtrade,deregulation,globalizationandalimitedgovernmentalrole.Acompetingeconomicsliteraturebeganemerginginthe1980sand1990sinoppositiontothismainstreamneoliberalism.
2
UNstudieshavelongexaminedindustrialpolicyapproachesfordevelopingnations.Forexample,a2016UNEconomicCommissionforAfrica(UNECA)studyfoundthat,
Thedebateonindustrialpolicyhasarguablybeenthemostideologicaloneinthehistoryofeconomics.Thebestproofoftheideologicalnatureoftheindustrialpolicydebateisshownbythedebateonthe‘economicmiracles’intheEastAsiancountries,likeJapan,(South)Korea,andTaiwan.Itishardtobelieveittoday,butuntilthe1980s,manymainstreameconomistsweredenyingtheexistence—nottospeakoftheefficacy—ofindustrialpolicyinthosecountries.Whydidtheseeconomistsdothat,whenaquicklookthroughfinancialnewspapersandmagazines—nottospeakashortvisittothosecountries—wouldhaverevealedhowextensiveandintrusivetheirindustrialpoliciesare?(UNECA,2016).
A2019InternationalMonetaryFund(IMF)reporthassummarizedthebasicpointnotedabove.ItlookedatcountriesthatachieveddevelopedstatusafterWorldWarII(CherifandHasanov,2019).Ofthefourteencountriesinthatcategory,theIMFstudyfoundthreetypes:
(i)Countriesthatusedmajornaturalresources—primarilyoil—foreconomicgrowth.ThesewereMiddleEasternnations.
(ii)Countrieswithsmallereconomiesthatwereabletogrowthroughintegrationintolargerregionaleconomies.Portugal,whichintegratedintotheEuropeanUnion(EU),providesanexample.
(iii)Countriesthatappliedindustrialpoliciesbasedongovernmentaleconomicinterventions.ThisistheEastAsiandevelopmentmodel.
Allthecountriesinthisthirdcategoryusedindustrialpoliciesasthebasisfortheirgrowth,includingJapan(whichhadtorebuildafterWorldWarII),Korea(Rep.of),Taiwan,andSingapore.Clearly,industrialpolicyhasbeenamajorpathwaytowardeconomicdevelopmentinthesedevelopingnations.Chinaisthelatestexampleofadevelopingnationinthisthirdcategory.TheIMFreport,likethe2016UNECAreport,ispartofalargerliteraturethat,particularlyaftertheeconomiccrashof2008
2Forthehistoricalcontextsee,forexample,Oqubay,Cramer,ChangandKozul-Wright(2020);AndreoniandChang(2019);Chang(1994);Amsden(1989);Johnson,(1982).
ECLACIndustrialpoliciesforthetwenty-firstcentury...9
whenmainstreameconomicsfacedsomethingofacomeuppance,suggeststhepotentialrelevanceofstudiesofindustrialpolicyapproachestodevelopingnations.
AnexaminationofarecentindustrialpoliciesintheU.S.thereforemaypresentsomeapproachesthatmayberelevanttodevelopingcountriesintheAmericas.Afteranin-depthexplorationofthesenewpolicies,anattemptismadetodrawlessonsfordevelopingeconomies.Theseincludeissuesregardingregionalinnovation,theimportanceofmanufacturingandadoptingcorrespondinginnovationinproduction,financingforproductionscale-up,workforceeducationandincorporatingboth“topdown”and“bottomup”approaches.
ECLACIndustrialpoliciesforthetwenty-firstcentury...11
I.TheUnitedStateshistoricalcontext
TheUnitedStateswentthroughwavesofshiftingindustrialpoliciesasitevolvedfromanagrarian,developingcountrytodevelopedstatusbythemid19thcentury.
3
Thesehavefollowedapatternofgovernmentalactionandreaction.AfteritsConstitutionformedacentralgovernmentin1789,thefederalgovernmentadoptedaseriesofindustrialpolicyapproachesincludingacentralbankingsystemandgovernment-ownedarsenalsandshipyardsformilitaryproduction.Atthestatelevel,therewasdirectsupportforroads,canals,steamshiproutes,railroadsandmanufacturing.Apoliticalreactioninthe1830sendedthecentralbankandopposedstate-awardedmonopoliesfortransportationinfrastructureinfavoroflaissezfairecompetition.
TheAmericanCivilWarin1861-1865andtheriseofthenorthernpoliticaldominanceformostoftheremainderofthatcenturyledtoanotherroundofinterventionistpoliciesfortranscontinentalrailroads,land-grantuniversitiesandlanddistributionthroughhomesteading.Thesubsequentriseofthecorporationasthecoreorganizationalmodelforindustrychallengedthepowerofthestate.Inturn,thisledtoa“progressive”reaction,encompassinggovernmentregulationofrailroadsandantitrustlaws.
DuringWorldWarI,thefederalgovernmenttookcontrolovermuchoftheeconomy,includingimposingwidespreadpricecontrols.Thiswasfollowedbyareactionagainstgovernmentalinterventionsthatlasteduntiltheeconomicdepressionofthe1930sandthe“NewDeal”interventionistpoliciesthataccompaniedit.DuringWorldWarII,controlscomparabletoWorldWarI’swereimplemented.
3ThispaperdrawsfromBonvillian(2022).
ECLACIndustrialpoliciesforthetwenty-firstcentury...12
A.Post-WorldWarIIdevelopments
Ontheinnovationpolicysideofthosewartimepolicies,VannevarBush—PresidentFranklinRoosevelt’sWorldWarIIscienceadvisor—ledthecreationofahighlyconnectedsystemfortechnologyadvance.Hisapproachenabledthefederallyfundedresearchuniversitytobeinitiatedatscale,andtheseuniversitieswerecloselylinkedtoindustry,themilitary,andgovernmentagencies.Federally-fundedresearchanddevelopmentcenters(latercalledFFRDCs)werecreatedaswell,andtheseelementsledtocriticalwartimetechnologyadvancessuchasradarandatomicweapons.Itwasanintensesystemof industrialpolicydesignedbyBushandothertechnologyleadersthatenabledtheU.S.andalliestowinthewar.Immediatelyfollowingthewar,Bushledthedismantlingofmuchofthisextremelysuccessful“connected”system.Herecommendedinsteadafocusonbasicresearchwithinadisconnectedsystem.Thetitleofhispolicytractadvocatingthisapproach,“Science,theEndlessFrontier,”wasdesignedtoappealtotheAmericansensethatopportunitybeckonsatthefrontier(Bush,1945).
Whydidheadvocatethisdisconnectedapproach?Withthewarmachinebeingdismantledintheexpectationofworldpeace,Bushlikelywastryingtosalvagesomepartsofthesystem.Hesawthepowerofthefederallyfundedresearchuniversityandadvocatedfederalsupportforbasicresearchthatcouldsustainthatcreation.Basicresearchisfarcheaperthanapplieddevelopment,andhelikelythoughtthegovernmentcouldstillsupportthatbasicstageamidthepostwarcutbacks.Healsowasconcernedthatscience,hadbecometootiedtogovernment,withallitsintensepoliticalandmilitarypower,andhewantedtoshieldit,reclaimitsindependence.Bushadvocatedwhatwaslatercalledthe“pipelinemodel”forinnovation,withearly-stageresearchasthefederalinputintothepipeline,withthe laterpipelineinputsleadingtotechnologydevelopmentrelyingonindustry.Themodeldisconnectedtheactorsinthatinnovationsystem.
OneoftheimplicationsofBush’sdisconnectedapproachwasthatthefederalgovernmentfailedtosupportinnovationinmanufacturingtechnologiesandprocesses.Thatwasindustry’sjob.TheU.S.wasthefirstnationtoadoptmassproductionatgreatscale,andbytheendofWorldWarIInonationwasclosetoitsindustrialoutputthroughthesemassproductioninnovations.Sotherewasnoneedforthegovernmenttofocusonmanufacturing,thatleadershipseemedassured.Yetproductioncanbehighlyinnovativeinitself—designinganewtechnologyorproductforimplementationisahighlycreativestep,involvingextensiveengineeringandoftennewsciencetobringanideatoamarketpricewithmarketresilience.YettheU.S.innovationsystemmissedthis—ittreatedtheresearchanddevelopment(R&D)stageasinnovationandfailedtograspthatproductionwasanimportantaspectofinnovation.Correspondingly,weaknessinproductioninnovationmeanserosionintheoverallinnovationsystem.
4
Toooftenitmeansthatnewproductsandtechnologiesremainideasandfailtoenterthemarketorarescaled-upelsewhere,withcorrespondingeconomicloss.
B.PositionofUnitedStatesmainstreameconomics
Bush’spipelinemodelalsoreflectedthesubsequentattitudesofmainstreamU.S.neoclassicaleconomists.Putsimply,theirviewhasbeenthatgovernmentalinterventionsinareaswheretherearenotclearmarketfailuresdistortmarketsandtheirefficiency.Therearetwounderlyingproblemseconomistshavenotedwithindustrialpolicy.Thefirstconcernsinformationasymmetry:governmentdoesnotknowwhattofocusonsoitsmarketinterventionswillbeinefficient.Thesecondconcernsregulatorycapture:rentseekersintheprivatesectorwillusegovernmentalsupportmechanismstodistortmarketstolimittheircompetition.
4ForadiscussionofthisproblemseeBonvillianandSinger(2018).
ECLACIndustrialpoliciesforthetwenty-firstcentury...13
PartofthereluctanceofU.S.mainstreameconomiststocountenancegovernmentinterventioninnotsimplyaneconomybutinitsinnovationsystem,comesfromthelimitsoftheirtoolset.Theseeconomistsemphasizemathematicaleconomicmodelingofmarketsandtheirefficiencyandhaveaninabilitytomodelandthereforeunderstandinnovationandthecomplexsystemsbehindit.Innovationrequiresconsiderationofmanycomplexelementsoutsideofscientificadvancesthatarenotreadilyamenabletoeconomicmodeling,suchasculture,traditions,vestedpoliticalinterests,changeagents,governmentalinfrastructure,publicexpectations,collectiveaction,andorganizationalmanagement.
5
Manymainstreameconomistshavetreatedinnovationasexogenous—importanttoeconomicgrowthbutbeyondthereachoftheirtoolsetstograpplewithandmodel.
Ontheotherhand,economistDaniRodrikhasnotedthatthecaseforindustrialpolicyrestsontwobasicrationales:externalitiesandcoordinationfailures(Rodrik,2022;Rodrik,2008).Externalitiesincludecostsorbenefitsthatproducers’actionscreateforsocietyatlarge.Becausethesocialbenefitofinvestmentsintechnologydevelopmentexceedsthebenefittothefirmitself,thefirmwillinevitablyunderinvestandmuchoftheoverallpotentialbenefitwillbeunderachieved.Coordinationfailuresoccurbecausefirmswillinvesttoadvancetechnologywherethereisadequateinfrastructure,R&Dknowledgeavailable,qualitysuppliersnearby,andaskilledworkforcepresent.Iftheseconditionsdonotexist,therehasbeenacoordinationfailureincreatingthem,andgovernmentagencieshavearoleinimprovingthecoordination.Thishaslongbeenthetheoreticalbasisforthepursuitofindustrialpoliciesindevelopingeconomies(Rodrik,2004).
However,intheU.S.,theabovecoordinationconditions—infrastructure,R&D,suppliers,andworkforce—havelongbeenpresentinmanyregions.Therefore,mainstreamneoclassicaleconomistshaveopposedgovernmentalindustrialpolicyinterventionasdisruptiveofmarketefficiencies.Despitethis,theU.S.governmenthaspursuedindustrialpolicyapproachesinaseriesofeconomicareas,wheremarketfailuresofvariouskindsprevail:healthcare,transportationandenergyinfrastructure,agriculture,andeducation.
Ontheinnovationside,thegovernmenthasprovidedstrongsupportforscientificresearch,whichhasbeenjustifiedasovercomingamarketfailure,sinceindustrygenerallycannotbeartheriskoflongtermresearchwithoutclearapplications.Butthegovernment,applyingtheBushpipelinemodel,hasgenerallyfollowedmainstreameconomicdoctrineandavoidedgovernmentalinterventionsinpost-researchinnovationphases,apartfromthedefensesector.Thishasincluded,untilrecently,alackoffocusoninnovationinmanufacturingtechnologiesandprocesses.
5Foradiscussionofthedynamicsofinnovation,seeBonvillianandWeiss(2015).
ECLACIndustrialpoliciesforthetwenty-firstcentury...15
II.Definingindustrialpolicy
A.Thedebateoversocialgoalsforindustrialpolicy
Apreliminaryquestionconcernsdefiningindustrialpolicy.In2013,aBritisheconomistbroadlydefineditas“anytypeofinterventionorgovernmentpolicythatattemptstoimprovethebusinessenvironmentortoalterthestructureofeconomicactivitytowardsectors,technologiesortasksthatareexpectedtoofferbetterprospectsforeconomicgrowthorsocietalwelfarethanwouldoccurintheabsenceofsuchintervention”(Warwick,2013;UNCTAD,2016;PageandTarp,2017).Morerecently,anotheranalystdefinedindustrialpolicyas“asetofpoliciesandprogramsexplicitlydesignedtosupportspecifictargetedindustriesandtechnologies”(Atkinson,2021).Inthissense,therecanbemultipleindustrialpolicies,foravarietyofgoals—includingU.S.internationalcompetitiveness,especiallyinadvancedtechnologysectors.
6
Othershavetakentheterm“industrialpolicy”andtriedtoapplyittogoalsthataremoreaboutsocialpolicy,takingupthe“societalwelfare”elementtoadvocatefor“mission-basedinnovation”(Mazzucato,KattelandRyan-Collins,2020;Mazzucato,2020).Thisapproachseekstoapplytechnologicalinnovationnotonlytotechnologicalchallengesbuttosocietalmissionssuchasreducingeconomicinequalityandbuildi
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