policymakers demonstrate

46 Philippe Aghion and Ufuk Akcigit
National Business Survey and regress productivity growth, patenting, or other
measures of innovativeness and entrepreneurship, over various measures of sectoral
intervention (subsidies, tariffs, etc.) interacted with the degree of competition
in the sector, and also with the extent to which intervention in each sector
is not concentrated on one single firm, but rather distributed over a larger number
of firms. They show that Total Factor Productivity (TFP), TFP growth and
product innovation (defined as the ratio between output value generated by new
products to total output value) are all positively correlated with the interaction
between state aid to the sector and market competition in the sector. Thus the
more competitive the recipient sector, the more positive the effects of targeted
state subsidies to that sector on TFP, TFP growth, and product innovation in
that sector. Moreover, Aghion et al. (2015c), show that the interaction between
state aid and product market competition in the sector is more positive when
state aid is less concentrated.
And finally Acemoglu et al. (2013) extend the Klette-Kortum model of
growth and firm dynamics to allow for high versus low R&D productivity firms.
Their model implies that subsidizing incumbents’ R&D inhibits the entry of
high-efficiency firms, which in turn can be detrimental to growth and welfare.
We get back to this paper in more details in Section 1.5 below.
Yet this does not address the issue of why vertical targeting would be at
all needed. A main theoretical argument in support of vertical targeting, is
the existence of knowledge spillovers. Thus, Aghion et al. (2015a) explore a
cross-country panel dataset of patents in the automotive industry. They distinguish
between ‘dirty innovations’ which affect combustion engines, and clean
innovations such as those on electric cars. Then they show that the larger the
stock of past ‘dirty’ innovations by a given entrepreneur, the ‘dirtier’ current
innovations by the same entrepreneur. This ‘path dependence’ phenomenon,
together with the fact that innovations have been mostly dirty so far, implies
that in the absence of government intervention our economies would generate
too many dirty innovations. Hence a role for government intervention to ‘redirect
technical change’ towards clean innovations. Indeed Aghion et al. (2015a)
show that an increase in carbon price (e.g., through carbon taxes) induces
firms to redirect innovation towards clean technologies (e.g., to develop electric
cars).
A reinforcing factor is the existence of credit constraints which may further
limit or slow down the reallocation of firms towards new (more growthenhancing)
activities. Now, one can argue that the existence of market failures
on its own is not sufficient to justify vertical intervention. On the other hand,
there are activities – typically high-tech activities – which generate knowledge
spillovers on the rest of the economy, and where assets are highly intangible
which in turn makes it more difficult for firms to borrow from private capital
markets to finance their growth.