1. ANTWERP, OCTOBER 2019
Christian Ketels, BCG Chief Economist
Towards a European
Industrial Strategy:
What role for clusters?

2. 1
The state of
Europe's
economy:
Is winter coming
early?

3. 2
China and the US start a trade dispute; and
Europe gets hit by a trade and manufacturing downturn
-20
-15
-10
-5
0
5
-5
0
5
10
Euro area growth (% YoY, 3m MA)
2018
EA export orders (% balance)
20192017
1: Share of total extra-EA exports plus intra-EA dispatches during Jan-Jul 2019
Source: Haver Analytics; BCG Henderson Institute: Center for Macroeconomics
Goods
exports (vol.)
Manufacturing
output
Export orders
Asia Intra-EA
2
AmericasRest
of EU
Non-EU
Europe
Africa Oceania
22
17
9
19
3
6
10
2
0-1
21
17
65
-16
-7
-44
2017-18 YTD growth
2018-19 YTD growth
Change in Euro Area goods exports (B EUR)
Growth in exports
from Jan-Jul 2017
to Jan-Jul 2018
Growth in exports
from Jan-Jul 2018
to Jan-Jul 2019
3.2 0.8 13.4 7.2 15.9 11.8 47.7
Share of EA
exports1 (%)

4. 3
Why is
Europe
suffering
when the US
and China
engage
in a trade
war?
• Many small open economies with high trade
shares
• Strong presence in industrial goods with
higher exposure to cyclical shocks
• A range of home-grown shocks throughout
2018; e.g. Brexit
• Concerns about the political capacity to
respond to shocks
• Structural weakness with low trend growth
and exposure to technological disruption
External shock
Internal drivers

5. 4
Short term outlook:
Map color:
Real GDP growth forecast (%)
GDP
forecast
(%)
1: Multiple forecasters
Source: European Commission, July 2019 forecast; BCG Henderson Institute
4.4
0.5
0.1
1.3
1.3
2.3
1.41
1.6
2019 GDP
Forecast
• ECB at the center of the policy
response, but is it appropriate and
effective?
• Some fiscal policy action embedded
in the European economic system,
but too little too late?
• European policy architecture better
equipped to deal with the last
crisis, but also with this one?

6. 5
Real GDP growth
The real worry? The slow-down might be structural,
not cyclical (and not only for Europe)
Long-term outlook
Source: Haver Analytics; IMF; EIU; Oxford Economics; OECD; BCG Henderson Institute: Center for Macroeconomics
2
0
-4
-6
-2
4
2005
Year
20152010 2020 2025 2030
Aging
Productivity
slowdown
0
2
4
20402019 2030 20602050 2070
4
-2
0
2
1990 20102000 2019
EU: Ratio of 15-64 yr
olds to 65+ yr olds
DE, FR, UK: Growth of output
per hour worked (3yr MA, %)

7. 6
The growth slowdown meets structural challenges
Challenging
geopolitical world
Digital
transformation
Climate
change
• Europe a model of the
rules-based system
• Europe has the size to
thrive in a power-based
system, too
• Europe struggles to deal
with the consequences of
disruption
• Europe is skill-rich and can
create needed rules
• Europe is a major CO2
emitter and resource user
• Europe has the capabilities
and ambition to move to
sustainability

8. 7

9. 8
A 'long-term strategy for European
industry' as a key part of the response
Challenging
geopolitical
world
Digital
transformation
Climate
change
Source: Excerpts from mission letters to commissioners-designate
… lead the reform of the World Trade Organization
… develop tools and policies to better tackle the distortive effects
of foreign state ownership and subsidies
… making better use of our trade defense instruments
… maximize the contribution of investment in research and
innovation
… work on enhancing Europe’s technological sovereignty
… work on a European approach on artificial intelligence
… 2030 emission reduction target … should increase to at least 50%
… work on the Carbon Border Tax
… propose the first European Climate Law; 'Green New Deal'

10. 9
Industrial policy plans are a dime a dozen;
how will this time be different?
European Commission
Industrial Policy Strategy
A Franco-German manifesto for
European industrial policy for the
21st century
European parliament industrial
policy assessment and
recommendations
2030 High Level Industrial
Roundtable
Joint declaration for an ambitious
EU industrial strategy
Illustrative list of reports
European Political Strategy
Center (EPSC)

11. 10
A new industrial policy: a proposal on four principles
Actions need to enhance
productivity, and be consistent with
market economy model
Strategy needs to trigger
aligned actions across EC and
member states
Strategy needs to
combine horizontal with
vertical (sector-specific) actions
Strategy needs to have
clear ambition, set priorities, and
define an implementation approach
WHAT
HOW

12. 11
Enhance framework
conditions?
Target specific
sectors?
Enhance competitiveness
by strengthening
framework conditions
with a sector-specific
approach
mobilizing public-private
collaboration
What is Modern Industrial Policy? The new thinking!

13. 12
A look at the European data:
how strong your clusters are matters…
Regional prosperity
• Framework conditions are a critical drivers
of prosperity
• Cluster strengths are an independent
additional driver of prosperity
• Cluster mix is a critical driver of prosperity
if measured individually, but is entirely
explained by framework condition quality
Source: Ketels, Protsiv (2018)

14. 13
The challenges to horizontal business environment
upgrading: speed and efficiency
• Necessary, but sufficient?
• Correct long-term, but also effective short-
term in accelerating growth?
• Focus on reducing weaknesses, not on
creating distinctive strengths
• Generic recipe with little guidance on how
to translate into location-specific agenda
• Either fragmented across many actions, or
focused on single measures
-2-4 0
-10
42 86
-5
0
5
10
Yemen
Average growth in WB Doing Business score (2010-18)
Average GDP Growth (2010-18)
Venezuela
Ukraine
Central African Republic
Uzbekistan
Ethiopia
Rwanda
Source: World Bank; Oxford Economics; BCG Henderson Institute, Center for Macroeconomics

15. 14
The role of
clusters as a
policy approach:
Two different
perspectives Creating clusters
Leveraging clusters
Enhance
framework
conditions
Target specific clusters

16. 15
How to
leverage
clusters
Platform for
collaboration
Setting agendas
for collective action
Organizing principle
for policy action

17. 16
The Massachusetts Life Sciences Initiative
When Harvard and MIT are not enough…
• Diagnosis
• Strategic choice
• Integrated action plan
• Governance
• Innovation
• Entrepreneurship
• Investment
Source: Susan Windham-Bannister

18. 17
Antecedents
Phase 1
(2000–06)
Phase 2
(2006–10)
Phase 3
(2010–)
Research
The Singapore
Biomedical
Science
Initiative:
Building sectoral
strengths in
tandem with
national strategic
ambitions
Translation Innovation

19. 18
Only in
biopharma and
high tech?
Food
Water
Energy
Logistics
Tourism
Automotive
Packaging
Aerospace
Finance
Creative
…
…
…
Mining

20. 19
Key success factors of cluster efforts
• Cluster strength
• Business environment
conditions
• Firm sophistication
• Collaboration culture,
trust
• Activities aligned with
needs of the cluster
• Activities leveraging
competitive strengths of
the location
• Activities integrated into
a broader strategy
• Leadership
• Quality of staff
• Budget and tools
• Governance
Context Activities Resources &
Capabilities
Source: Sölvell, Ketels, Lindqvist (2003)

21. 20
If clusters are so powerful, why are they not playing a
more central role in industrial policy?
Regional action with
limited bridges into
national and
EU policy framing
Where?
Focus on enabling
collaboration and more
effective delivery, not on
shaping policies
What?
Policies to support SMEs, with
limited focus on engaging large
companies
For Whom?
To play a
meaningful role in
European
industrial policy,
clusters need to
evolve their
operating model

22. 21
Making it
happen….
Leverage platforms like TCI to work across
clusters in shaping policy
Develop your skill set as a cluster manager
around broader framework policies
Reframe our understanding of the role
of cluster organizations

23. 22
It requires recognizing the new
demands on working models and
capabilities
Making it happen is not just a
matter of will and ambition

24. 23
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25. bcg.com

26. 25
5 questions
What is industrial policy?
What are the root causes that have driven Europe
towards its current situation?
How should proposed actions be prioritized to ensure
appropriate focus and impact?
What are the key choices and trade-offs Europe is
facing?
Concretely, how and by whom will proposed actions
be executed?
Initial thoughts on
paper

27. 26
What are key choices Europe is facing?
Infrastructure
Climate
Change
Skills
Foreign Trade
& Investment
Competition
Policy
Digitalization
Fiscal rules
vs spending
needs
Current vs
future
competit-
iveness
Migration
needs vs
integration
strains
Openness vs
level playing
field
Innovation vs
market
power
Size & speed
vs privacy &
ethics
What are Europe's key
choices?
4

28. 27
What are key areas of European strengths?
Large integrated market
Science and innovation
capacity, especially in areas
critical to address some of
the key global challenges
Societal model that drives
advanced demand,
and is attractive for many
around the world
But still fragmented
in services, digital
But need a plan to
move from potential
to actual
But needs a vision to
leverage
Need to focus on optimally leveraging key strengths
What are Europe's
strengths?
3

29. 28
How to make
things happen?
Part 1: why the
old model no
longer works
EU's model of collaboration was crucial to achieve
common standards and a level playing field…
• Identify European action priorities
• Organize EU programs around these priorities
• Mobilize European countries and regions to help address
these common priorities
• Evaluate countries’ and regions’ performance against the
benchmark of EU-wide objectives
But given a more heterogeneous Europe and
a new set of economic needs it…
… is getting politically
increasingly costly
to pursue
… is economically
generating increasingly
fewer benefits
How to make things
happen?
5

30. 29
How to make
things happen?
Part 2: what a
new model
needs to enable
Specialization
across locations
Roles & responsibilities
between EU, EU member
countries, and
European regions
How to make things
happen?
5

31. 30
Be careful about…
… wishful thinking outcomes
… long list of individual actions, with no common logic
and systemic interaction
… avoiding choices, including on trade-offs between
competing objectives
… installing value-destroying ideas to show action (no
action may sometimes be preferable)