Policies that convey static, short-term cost advantages but that unconsciously undermine innovation
and dynamism represent the most common and most
profound error in government industrial policy. In a
desire to help, it is all too easy for governments to
adopt policies such as joint projects to avoid “ wasteful” R&D that undermine dynamism and competition. Yet even a 10% cost saving through economies
of scale is easily nullified through rapid product and
process improvement and the pursuit of volume in
global markets— something that such policies under-
mine.
There are some simple, basic principles that governments should embrace to play the proper supportive role for national competitiveness: encourage
change, promote domestic rivalry, stimulate innovation. Some of the specific policy approaches to guide
nations seeking to gain competitive advantage include the following.
Focus on specialized factor creation. Government has critical responsibilities for fundamentals
like the primary and secondary education systems,
basic national infrastructure, and research in areas