The DeLorean from the Back to the Future trilogy is arguably one of the world’s most iconic sports cars of all times. Its industrial trajectory is less celebrated, but it’s a telling one for policy makers pinning their fortunes on a new breed of subsidies-heavy mercantilist policies. 

A talented car engineer, John DeLorean left General Motors in the mid-1970s to pursue the vision of a new futuristic car. His DMC-12 prototype upended traditional car design. Featuring a stainless steel body and gull-wing doors, Mr DeLorean wanted it to become the world’s first “ethical” car — safe, fuel-efficient, quick. 

Now that private money is more costly, public incentives offer rent seekers an alternative

The whole endeavour required plenty of capital to get off the ground, and Mr DeLorean resorted to his renowned charisma to court governments around the world looking for public incentives. Eventually, he managed to seduce British officials, who thought a DeLorean factory could spark much needed economic development in Northern Ireland at the height of the Troubles between the Unionist and Republican factions. 

The British government ended up pumping at least £77m between 1978 and 1982 (around £390m today) to support the new manufacturing facility of the DeLorean Motor Company Limited (DMCL) in Dunmurry, Northern Ireland

While DMCL did achieve some level of social success as members of the contending factions peacefully joined forces to fulfil Mr Delorean’s vision, the entrepreneurial venture failed spectacularly. The facility shut down in 1982 as sales never lived up to expectations. Meanwhile, Mr DeLorean was arrested on drug trafficking charges as the FBI accused him of designing a scheme to sell 100kg of cocaine to save the business. He was found not guilty in 1984, but the damage was already done: fewer than 10,000 DMC-12 cars were produced. 

“As an entrepreneur, DeLorean responded opportunistically to a set of incentives based on the desperation of officials and politicians for inward investment; this opportunistic behaviour involved rent-seeking activity,” argued Graham Brownlow, a lecturer in Economics at Queen’s University Centre for Economic History in Belfast in a paper published in 2015. 

A similar level of desperation can be seen in some of the industrial policies introduced in the US and Europe in the past couple of years. After outsourcing most of its semiconductor manufacturing to East Asia, the White House now wants to turn the clock back and has put billions of dollars on the table to serve that purpose. It approved an even bigger programme to establish a domestic clean tech industry, beginning with all things electric mobility, where China has a gigantic lead. The EU has also embraced the mantra of resilience and sovereignty to unleash state aid, once a taboo term in Brussels, in strategic sectors. 

Inevitably, rent-seekers have popped up. Entrepreneurs and companies with little track record, if any at all, are vying for public incentives worth dozens, sometimes hundreds of millions of dollars. Look no further than the battery space to find the first homegrown gigafactories going bust. 

“I worry that this dash for subsidies will create distortions in the market,” UK investment minister, Lord Dominic Johnson, tells fDi.

It’s true that industrial policies and public subsidies have played a major role in the successful deployment of new technologies in market economies. Feed-in tariffs have been instrumental to the mass deployment of renewable energy technology across latitudes, while targeted industrial policies have sparked the successful development of hi-tech industries in countries like South Korea and Taiwan. 

But if there is a lesson from 15 years of near-zero interest rates, it is that free money tends to be misallocated more often than not. Now that private money is more costly, public incentives offer rent seekers a good alternative, which engenders the same risk of misallocation. National and local governments have a responsibility to run thorough due diligence and design effective, performance-based incentives schemes to generate the highest returns on taxpayers money. If they don’t, it will be Back to the Failure all over again.

This article first appeared in the April/May 2023 print edition of fDi Intelligence.