Industrial Mobility and Public Policy

In many countries, there is growing public concern about the issue of industrial mobility. Several barriers to the mobility of industries have fallen during past decades. A lot of industries have reduced production at their traditional locations while starting production at other locations. And even more industries are voicing the intention to do the same.

In this chapter, links and differences between the related literature and the present study will be pointed out. The present study concentrates on local resource constraints, inter-industry mobility differentials, differentiated (targeted) industrial policy, and inter-local rent shifting. Apart from industry-specific subsidies, the present study will also discuss inter-industry resource-price differentials and emission taxes as instruments of public policy. As other studies have already addressed facets of these issues, it is interesting to compare the frameworks and the resulting policy prescriptions which have been provided by other studies to the framework and the resulting policy prescriptions in the present study: In how far does the approach to industrial and environmental policy in the present study lead to other insights than other approaches to these policies? To allow such comparisons, established theories which look at (non-cooperative and cooperative) public policy of local governments and which are related to the issues in the present study will be surveyed in this chapter, first with regard to industrial policy and then with regard to environmental policy.

In this chapter, a basic version of a new model of local resources and industrial mobility will be introduced and analysed. The model is a partial-equilibrium model where there are local resource constraints and industries differ with regard to their mobility. The framework allows to address the questions concerning optimal public policy which have been raised in the introduction, especially the issue of rentshifting targeted industrial policy: Does a local government want to favour mobile industries compared to immobile industries in order to raise local income? This chapter is structured along the following line: The main elements of the new model are presented in a non-formal way. Formal assumptions are made to specify the model. The market structures which may result are described. A look at the preferences of a local government leads to the best-reply curves and the noncooperative equilibrium in a game played by governments at different locations. Local and global cooperation are characterized. A graphical illustration of the model and its policy implications is given. Finally, a potential for a re-interpretation of the framework is pointed out and the extensions which will be given in subsequent chapters are outlined.

In the last chapter, it was shown that local governments may tend to implement subsidy differentials which favour mobile industries compared to immobile industries when there is conflict among the local governments. In this chapter, it will first be shown how such subsidy differentials can be re-interpreted in the context of social policy. Then it is investigated how robust the implications of the basic model are when some restrictive assumptions of the basic model are relaxed. This means that the role of some additional potential determinants for the size of non-cooperative subsidy differentials in favour of mobile industries is checked: How may a local government want to adjust such a subsidy differential if mobile and immobile industries differ with regard to market sizes, demand elasticities, profitabilities, and the productivities of abundant general and scarce local resources? And which effects may the degree of inter-industry substitution and the number of competing locations have on the size of the relative subsidization of mobile industries?

In the last two chapters, it was discussed how local governments which are interested only in the net income of “their” local resources may arrange public policy towards mobile and immobile industries. This relied on the observation that the consumers of outputs and the owners of industries often do not live at the places of production such that local governments at the places of production may not feel responsible for output prices and profits. Nevertheless, it may happen that products are consumed locally and that industries are owned locally. Moreover, it may be that production causes positive or negative, local or global externalities. Accordingly, it is the purpose of this chapter to investigate in which way the policy implications of the basic model may change if local governments take these additional elements of welfare into account. There are especially the following questions: Is there still an incentive for a local government to favour a mobile industry compared to immobile industries if the mobile industry produces for the world market and the immobile industries produce for the local market? Should a differential in the pollution intensities of mobile and immobile industries be completely or partly internalized via an adjustment of the relative subsidization of the industries? Is there always an incentive to engage in ecological dumping in view of mobile industries? Can a high environmental standard help to attract mobile industries?

Local resource constraints and industrial mobility are important determinants of industrial activity across locations. To focus on some main questions concerning public policy in view of these issues, the analysis in the preceding chapters relied on a strict distinction between locally scarce resources and locally abundant resources and on another strict distinction between mobile industries and immobile industries. However, these two strict distinctions are somewhat drastic: Evidently, many resources are in an intermediate position between a presence of strict local resource constraints and a complete absence of local resource constraints. And many industries are in an intermediate position between extreme mobility and extreme immobility. In this chapter, it will be discussed how policy implications may be affected when “weak” local resource constraints or “weakly” mobile industries are considered instead of strict local resource constraints or strictly mobile industries. The first section focuses on imperfect intra-industry substitution in the mobile industry. And the second section looks at mobility of local resources. The analysis is another check for the robustness of the conclusions which have been proposed in the preceding chapters.

The issue of industrial mobility has stimulated a lively political debate in many industrialized countries during the last years. It has been realized that the domestic presence of mobile industries is essential for securing high local income. It is incompatible to postulate persistent increases in the rewards for domestic resources while at the same time accepting that mobile industries shift abroad. The scenario is that some regions may be left with just those immobile industries which cannot move off. This scenario is not appealing, especially to the extent that mobile industries may coincide with modern or clean industries and immobile industries may coincide with old-fashioned or polluting industries. The increasing mobility of some industries has to be seen against the background that regions are often endowed with a stock of local resources, like labour, land, and infrastructure, which is difficult to change.