A Case of Government Industrial Investment becoming Foreign Aid | Print Version
by Harry Valentine*
Le Québécois Libre, May 15, 2014, No 322
Link: http://www.quebecoislibre.org/14/140515-12.html

In early 2014, a story appeared in the business media about government investing over $1 billion in a high-tech and telecommunications company located in Southern Ontario. Some two years earlier, the Government of Ontario invested over $1 billion in a South Korean manufacturer of windmills, with the possible intention of capturing a significant share of the North American windmill market. But subsequent to the investment, most wind farms bought windmills and related equipment from other manufacturers. Government investment in high technology is reminiscent of events that happened during the 1990s involving the high-tech boom that preceded the high-tech bust.

Supporters of government investment in industry are quick to dismiss opponents of such practices by repeating the well-worn cliché, “It’s not the amount of money that government invests, it’s the downstream spin-off benefits that result from that investment.” At a previous time, this author gained access to several years of annual reports from a government department that invested in transportation technology development. While some pieces of technology never made it to market, other pieces of technology entered production to compete in the market. In at least two very high profile cases, crown corporations were the customers.

However, a few pieces of transportation technology had to compete on the open market and within five years of first entering production, the market for such technology had practically disappeared. This author sought to examine the alleged downstream benefits of the government investment, only to discover that there was comparatively very little in the way of long-term downstream benefits. The episodes of government investment provided some short-term employment and some short-term production, if such events can even be called downstream benefits.

However, the claim of downstream benefits has also been applied to the high-tech and telecommunications industries. During the early 1980s, the high-tech and telecommunications industries were developing quite rapidly on mainly private sector funding. Personal and home computers began to appear on market shelves, replacing large mainframe corporate computers that appeared during the late 1960s and early 1970s. Sales were good and profits were high. College and university graduates with expertise or training in telecommunications and high technology were assured of employment, while private investors in these sectors could expect high rates of return. The demand for expertise in these sectors often exceeded the supply of available domestic candidates. 

Political advisors in both Canada and the USA, as well as in several other developed nations, began to expound on the merits of government investing in high technology and telecommunications. The chairman of the American Federal Reserve at the time, Alan Greenspan, theorized about creating a perpetual economic boom that the bank could sustain. Massive amounts of government funding poured into high technology and telecommunications companies, while educational institutions introduced new programs to supply the demand for qualified candidates. Sector companies also hired large numbers of highly-educated, foreign-trained candidates.

Entrepreneurs who could present new ideas in telecommunications, high technology, or the development of information sector programs gained easy access to government funding. Profits initially soared as new technology and new programs became commercially available. Supporters of increased government investment scoffed at free-market economists who warned of an overheated high-tech market that was a bubble that could burst. But it did burst, with massive loss of employment. Huge numbers of small start-up companies collapsed, and even some big-name companies declared bankruptcy. The dotcom bust and high-tech meltdown provided an opportunity to investigate the real downstream benefits of government investment.

Many companies that survived the high-tech sector economic shake-out relocated part or all of their operations overseas. They urgently needed to reduce expenses, including labour costs. High-tech expertise was available at low cost at several overseas locations, such as China’s Pearl Delta and the Bangalore and Hyderabad districts of India. Following the high-tech meltdown, information sector, high-tech and telecommunications business ideas were available at bargain-basement prices, despite the billions of dollars that governments in developed countries had pumped into those sectors during the boom years.

Foreign entrepreneurs and domestic entrepreneurs who moved their operations to overseas gained easy access to technology that they could further develop in a saner business and economic environment, literally improving on business and technology ideas that originated in North America. The high-tech and information sector companies located in the developing world could access such technology and sufficiently improve on it or change it so as to circumvent the patents. Perhaps out of $500 billion worth of government high-tech investment, foreign operations may have gained access to about $50 billion of downstream benefits.

A comparison can be made to government funded railway development in mid-19th century America, where most of the early government-funded players went bankrupt. Later entrepreneurs could purchase railway access at bargain prices and build competitive railway companies. Likewise, misguided government investment in the North American high-tech, telecom and information sectors resulted in their eventual economic collapse, leaving the often-valuable spoils of that collapse available to overseas interests at very low prices. Directly and indirectly, the rest of the North American economy provided the funding that government redirected to the high-tech, telecommunications and information sectors.

When supporters of government investment in industry raise the importance of the downstream spin-off benefits to such investment, they might want to re-examine economic events from the 1990s investment melee into the high-tech, telecom and information sectors, and how much of those downstream benefits gravitated overseas into the high-tech and information sector districts of Bangalore, Hyderabad and the Pearl Delta. Without a high-tech and information sector economic collapse in North America, Asia’s high-tech and information sector may otherwise have been much smaller and much less developed than it currently is.

* Harry Valentine is a free-marketeer living in Eastern Ontario.