policymakers demonstrate

Innovation and Growth: The Schumpeterian Perspective 45
that outside financiers involved in frontier-innovation will ask for a higher share
of upside revenues and also for higher control rights: hence the role of equity
in financing frontier innovation.
1.4.2 Competition Policy against Industrial Policy
Should sectoral policies always be precluded if we (justifiably) believe in the
virtues of competition for innovation-led growth? Our answer is that sectoral
policy can be designed and governed in a way that reconciles it with the need
for more product market competition.
Indeed, the ‘pick winner’ objection against sectoral policy loses bite when
vertical targeting is properly designed and governed: in particular, when: (i) the
government chooses to pick activities, not particular firms: indeed, while governments
and policy-makers do not have all the knowledge and wisdom needed
for proper vertical selection, identifying activities with high growth potential
is presumably easier than selecting individual firms 14 ; (ii) the criteria underlying
the selection of activities are clear and verifiable: in particular, recent
research 15 points at skill-intensity and the degree of product market competition
as relevant selection criteria for vertical targeting; and (iii) the vertical
interventions are properly governed: in particular, they should be governed in
a way that preserves or even enhances product market competition in the corresponding
sectors, and also in a way that guarantees exit from nonperforming
activities.
First empirical support for rethinking sectoral policy is provided by Nunn
and Trefler (2010). These authors use micro data on a set of countries to analyse
whether, as suggested by the argument of ‘infant industry’, the growth of
productivity in a country is positively affected by the measure in which tariff
protection is biased in favour of activities and sectors that are ‘skill-intensive’,
that is to say, use more intensely skilled workers. They find a significant positive
correlation between productivity growth and the ‘skill bias’ due to tariff
protection. Of course, such a correlation does not necessarily mean there is
causality between skill-bias due to protection and productivity growth: the two
variables may themselves be the result of a third factor, such as the quality of
institutions in countries considered. However, Nunn and Trefler show that at
least 25 per cent of the correlation corresponds to a causal effect. Overall, their
analysis suggests that adequately designed (here, skill-intensive) targeting may
actually enhance growth, not only in the sector which is being subsidized, but
also the country as a whole.
More recently, Aghion et al. (2015c) argue that sectoral policy should not
be systematically opposed to competition policy. They use Chinese firm-level
panel data. More precisely, they use firm-level panel data from the Chinese