Despite major waves of privatization in the past, public ownership of companies worldwide is by no means in decline: At the end of 2017, approximately 14 percent of the 10 largest listed companies were publicly owned. This is primarily due to the constant change in the international environment caused by globalization, technological change, and recurring crises. For example, globalization, in the form of sovereign wealth funds, is increasingly affecting cross-border public ownership or control of companies, in addition to growing trade relations and direct investments.
The question of the extent to which the state itself should be involved in the production or provision of goods within a market economy has always occupied a central place in the debate on regulatory policy. Traditional public finance has assigned the state a central role wherever it is a matter of preventing or correcting "market failures"; for example, the provision of public goods or "natural monopolies," such as important elements of a country's infrastructure. What appears in textbooks to be a clear-cut demarcation line in this regard turns out to be anything but trivial in practice. Not only have technological developments led to the complete change in the nature of former "natural monopolies" (e.g., telecommunications), but economic policy has also repeatedly paved the way for public monopolies to change their character by reducing the scope of services. This allows for new forms of competition between public and private companies, as the example of private railways on publicly provided rail infrastructure shows.
The role of the state as an investor or producer of goods and services must therefore be viewed in a much more nuanced way than the traditional theory of market failure would seem to suggest. This is especially true because a multitude of current economic policy problems suggest a rethinking of the role of the state in the economy.
A distinction must be made between various aspects with varying timescales of relevance: In an economic crisis such as the current Covid-19 crisis, it can make sense for the state to invest in companies that are otherwise healthy in order to strengthen their equity base and help them navigate the crisis – with the firm intention of exiting the company later with a profit. This crisis capital can be a sensible alternative to pure subsidies without public acquisition of ownership, because it ensures that it is only used by the affected companies in an emergency. In addition, companies with core state ownership have easier access to the bond market in times of crisis and can also borrow there more cost-effectively. However, this is not a long-term strategic investment, but rather a temporary intervention.
A much more fundamental approach is to allow the public sector to take a minority stake in companies for which the state, as a long-term core shareholder, could represent an advantage in the growth process. This should be viewed against the backdrop of identified weaknesses in the Austrian business location (for example, in the Austrian capital market).
The EU Commission's Industrial Strategy of March 10, 2020, emphasizes the need to strengthen strategic autonomy in Europe. This objective marks a clear departure from simple textbook approaches, because "strategy" presupposes a complex environment in which the objectively available legal, technological, and economic possibilities are always counterbalanced by one's own strengths and weaknesses. In economic jargon, a strategic orientation is required when the market does not necessarily lead to a single optimal outcome, but rather when a multitude of different equilibria are possible and can be influenced by political decisions.
Internationally, both the basic understanding and the tasks of public corporate investment have changed in recent decades.
Christoph Badelt, Head of the Economic Research Institute WIFO
However, the mandate of a strategic industrial and location policy can also be easily misunderstood. To prevent its further development from resulting in a reversion to old behavioral patterns and mistakes, critical issues must be openly addressed:
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- Strengthening the possibilities for political control affects not only the production of goods, i.e. industry in the traditional sense, but all economic sectors that provide or depend on critical raw materials, technologies or infrastructure services.
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- Strategic industrial policy aims at high competitiveness. This requires competition and thus the free exchange of goods and investments. This principle is particularly important for small, open economies like Austria.
- Expanded instruments such as the new European framework for screening foreign direct investments – and, where appropriate, preventing corporate takeovers – are intended to enable policymakers to intervene quickly when necessary and only in exceptional cases, but should under no circumstances become routine or entail complex administrative processes.
If the government sharpens its instruments to prevent the migration of critical corporate cores through foreign direct investment in individual cases, it must also strengthen the institutions and instruments for its own investment management. ÖBAG, as a long-term investor, assumes this role to safeguard the interests of the Republic of Austria.
An actual WIFO study on behalf of ÖBAG highlights three cornerstones for a strategy to strengthen the equity base of private companies through public anchor shareholders:
- The restriction to well-founded exceptional cases (including public services, critical infrastructure or securing company headquarters of importance for location policy) and only if there are no private anchor shareholders at the location.
- Effective corporate governance that consistently and credibly prevents political influence on operational decisions and enforces sustainable increases in the value of public shareholdings.
- The temporary provision of crisis capital for companies that are inherently competitive and of particular importance for the location requires an explicit exit scenario (e.g. by selling the shares on the stock exchange or to private anchor shareholders).
Christoph Badelt has headed the Austrian Institute of Economic Research (WIFO) since 2016. Badelt has been a professor of economic and social policy at the Vienna University of Economics and Business since 1989. From 2002 to 2015, he served as rector there and for several years as chairman of the University Conference (uniko).
Michael Peneder is an economist and has worked in the WIFO research department "Industrial Organization, Innovation and International Competition" since 1992. His research has taken him to the international universities of Harvard and Stanford, among others. Peneder's research results are regularly published in academic journals.
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