Picking Winners

Published Sep 8, 2024

Definition of Picking Winners

Picking winners refers to a strategy often employed by governments or investors where they select and support specific industries, companies, or sectors believed to be capable of outperforming others and driving economic growth. This typically involves providing targeted financial assistance, tax incentives, or regulatory support with the goal of nurturing a particular area of the economy. The ultimate objective is to stimulate innovation, increase competitiveness, and create jobs.

Example

Let’s consider the government of a country that decides to boost its renewable energy sector. Believing that renewable energy technologies like solar and wind power have significant future growth potential, the government introduces several initiatives to support this sector. These include:

• Providing subsidies and tax breaks to companies involved in the production of renewable energy technology.
• Offering grants for research and development in renewable energy.
• Implementing policies that mandate a certain percentage of the country’s energy must come from renewable sources.

As a result of these measures, companies in the renewable energy sector see increased investment, and new startups emerge. The overall output of renewable energy grows, helping the country reduce its reliance on fossil fuels and positioning the nation as a leader in green technology.

Why Picking Winners Matters

Picking winners is significant for several reasons:

1. Economic Growth: By identifying and supporting sectors with high growth potential, governments can stimulate overall economic development, creating new industries and high-paying jobs.
2. Innovation and Competitiveness: Targeted support can foster innovation, allowing domestic companies to compete more effectively on a global scale.
3. Strategic Advantages: Developing certain industries can provide strategic benefits, such as energy independence or leadership in cutting-edge technologies.

However, it’s crucial to note that picking winners also comes with challenges and risks. The government or investors must accurately predict future trends, and there’s always a risk of misallocation of resources if the chosen sectors do not perform as expected.

Frequently Asked Questions (FAQ)

How do governments decide which industries or companies to support when picking winners?

Governments use various criteria to determine which industries or companies to support. These can include:

• Economic forecasts and market trends indicating high growth potential.
• Strategic importance for national security or economic stability.
• The ability to create substantial numbers of jobs.
• Opportunities for innovation and leadership in emerging technologies.

Additionally, governments may consult with industry experts, conduct economic research, and assess the potential long-term benefits and risks.

Can the strategy of picking winners backfire, and if so, how?

Yes, the strategy can backfire in several ways:

1. Misallocation of Resources: If the chosen industries do not perform as expected, the financial and regulatory support may be wasted.
2. Market Distortion: Government intervention can distort market competition, giving unfair advantages to supported companies over others.
3. Dependence: Companies that rely heavily on government support might struggle when such incentives are reduced or removed, leading to sustainability issues.

It’s essential for governments to make informed decisions and continuously reassess their support strategies to mitigate these risks.

Are there any successful examples of picking winners in history?

Yes, there are several notable examples of successful picking winners:

• South Korea’s Chaebol Strategy: In the 1960s and 1970s, the South Korean government provided substantial support to large family-owned business conglomerates known as “chaebols.” This strategy led to the rapid growth of companies like Samsung and Hyundai, making South Korea a leader in technology and manufacturing.
• Japan’s Post-War Industrial Policy: Following World War II, Japan identified key industries like automotive and electronics for support. The strategic investments and policy measures helped companies like Toyota and Sony become global giants.
• Germany’s Renewable Energy Sector: The German government has long provided support for the renewable energy sector through subsidies and regulatory frameworks. This has established Germany as a leader in renewable energy technology and significantly increased the proportion of energy generated from renewable sources.

These examples demonstrate how targeted support can lead to significant economic advances, though they also underscore the importance of making well-informed strategic decisions.