Manufacturing and industrial policy - picking winners

Two stories from this week on industrial policy and manufacturing caught attention. 

A Livemint editorial writes about India's manufacturing challenge

As a percentage of GDP, manufacturing output has remained stagnant at 14-17% of GDP for years. The UPA government’s efforts did not succeed in increasing it. The Modi government has also not succeeded so far. The export basket has also shifted away from labour-intensive products. Between 2000 and 2015, the share of capital-intensive products in merchandise exports increased from 32% to 53%, while that of unskilled labour-intensive products declined from 30% to 17%. While Bangladesh and Vietnam have seen a sharp increase in their share of global clothing exports from 2.6% in 2000 to 6.4% in 2018, and 0.9% in 2000 to 6.2% in 2018, respectively, India’s share has risen marginally – from 3 to 3.5%...

What is required, therefore, for sustainable GDP growth is a big push for labour-intensive industrialisation. But the government is going the opposite – extending policy support to capital-intensive industries... Economist Radhicka Kapoor has argued emphatically that blaming the lack of progress on labour reforms is lazy analysis and fails to explain India’s unemployment and underemployment problem... Kapoor’s analysis shows what’s actually keeping the manufacturing sector from growing and generating more jobs – the size of the market, capital formation, credit availability, infrastructure, and government policies. Policymakers have also erred by presuming that the large number of small firms and startups in India will take care of the employment constraint. If the manufacturing sector is to grow quickly and smartly, then large firms in labour-intensive industries should be encouraged as they will bring technology, capital, best management practices and economies of scale to the sector.

Business Standard reports that Foxconn has applied to establish a second semiconductor manufacturing facility (in addition to its JV with Vedanta at Dholera in Gujarat to make 28 nm chips), and that too without incentives. Foxconn has two companies in India, Foxconn Hon Hai and Bharat FIH. 

A top government official aware of the developments said: “Foxconn is bullish on India. It has even shown interest in putting up another chip plant in the country, without any financial incentive from the Centre. It shows the company’s long-term commitment.”... Foxconn, which is the world’s largest electronics manufacturer with revenues of $224 billion, buys globally over $40 billion worth of chips annually for its customers. This figure will only grow given its entry into electric vehicles, and India could be the source of its chip requirements... its current strategy is to find customers who will brand and sell electric vehicles, just like its arrangement with Apple Inc. The official also confirmed that Foxconn has committed to generating about 200,000 jobs, up from around 35,000 currently. He said that considering that one line of Apple iPhone employs 5,000 workers, the target of 200,000 is feasible in the next three to four years... Foxconn’s foray into semiconductors began after it bought Taiwanese chip maker Macronix International in 2021 for $90 million. Macronix makes chips used in electric vehicles.

There is also news that Apple has prioritised its India operations by making India a sales region within the company, and the push to diversify manufacturing outside of China. 

In this context, it's not unreasonable to orient a part of industrial policy towards courting and backing to the hilt five or six big contract manufacturers across textiles, footwear, and electronics. The Government of India should play the honest broker role of co-ordinating with 15-20 top global (read East Asian) contract manufacturing firms in these sectors and facilitating their engagement with state governments. It should seek to converge Foxconn's ambitious business plans with the country's economic interest of fostering manufacturing and creating jobs. 

In some ways, this approach is effectively formalising crony capitalism by offering preferential treatment and long-term deep relationship with these manufacturers. As I have blogged here, here, and here, this is the strategy adopted in the infrastructure sector. For sure, it'll have its incentive distortions and set of problems, but the benefits can be orders of magnitude higher. It appears a very practical and likely to be effective approach to expand and deepen the country's manufacturing base while also creating productive and good paying jobs. Besides, the presence of a big contract manufacturer creates an ecosystem of high quality component manufacturers and brings with it significant knowledge spillovers and learning by doing productivity improvements. In any case, if one has to play crony capitalism, then Foxconn or Dixon or Toray or Apache are a better bet than a lot of others. 

This would go against the conventional wisdom of orthodox economics which scorns at picking winners. Here the government would be explicitly picking winners and backing them for the long-term. Who are we to say that it's not a successful approach when all the successful North East Asian economies have rode on the success of this strategy. 

Does the Indian system have the required self-discipline to keep these winners honest and pursue the common objective? Neither does the country's post-independence license raj that ended up supporting a few less than globally competitive big family businesses and recent history with some infrastructure sector  firms inspire confidence. But if the winners are forced into export competition, then there is a likelihood of its success.