Government efforts to support specific industries or sectors of the economy.
Industrial policy refers to government actions aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation. It involves strategic interventions to support specific industries or sectors deemed important for economic growth and development.
The main goals include fostering innovation, enhancing productivity, creating high-value jobs, promoting exports, and achieving strategic autonomy in critical sectors.
Industrial policy employs a range of tools, including subsidies, tax incentives, trade protection, public procurement, research and development support, and infrastructure development.
While traditional industrial policy often focused on manufacturing, modern approaches may target high-tech industries, services, or green technologies.
Industrial policy has been controversial, with debates over government's ability to 'pick winners'. Recent approaches emphasize 'soft' industrial policy, focusing on improving the business environment and addressing market failures.
Industrial policy draws on theories of economic development, innovation economics, and strategic trade theory. It incorporates insights from studies on learning-by-doing, economies of scale, and positive externalities in industrial development.
If industrial policy emphasizes capability building and addresses market failures, then it can enhance overall sector competitiveness without creating inefficient 'national champions'. South Korea's industrial policy in the 1960s-80s focused on building technological capabilities across entire sectors, leading to the emergence of globally competitive firms in electronics, automobiles, and shipbuilding.
If governments establish effective channels for dialogue and collaboration with the private sector, then industrial policies can be more responsive to market needs and opportunities. Japan's deliberation councils, which brought together government officials, business leaders, and academics to formulate and implement industrial strategies, played a crucial role in the country's post-war economic miracle.
If industrial support measures include clear time limits and performance criteria, then they can encourage efficiency and prevent the entrenchment of inefficient firms or practices. The U.S. Advanced Technology Program, which provided time-limited R&D funding to firms in high-tech sectors, included strict performance requirements and regular evaluations, leading to successful commercialization of new technologies in areas like advanced materials and biotechnology.
If industrial policy focuses on creating supportive ecosystems rather than individual firms, then it can foster sustainable innovation and competitiveness. Israel's Yozma program, which catalyzed the country's venture capital industry through public-private partnerships, helped create a thriving startup ecosystem that has produced numerous successful high-tech companies.
If industrial policies are integrated with other policy areas such as education, infrastructure, and environmental protection, then they can contribute to broader sustainable development objectives. Germany's Energiewende (energy transition) policy combines industrial policy with environmental goals, supporting the development of renewable energy industries while addressing climate change challenges.