From Industrial Policy to National Industrial Strategy: An Emerging Global Phenomenon

Defining Industrial Policy

In general, what has traditionally been called industrial policy has a national government playing an active, participatory role in guiding the direction of various business sectors (although usually manufacturing, it can include activities in the agricultural or service sectors) and their respective firms within the national economy (see Audretsch, 1998; Lehne, 2013; Pack, 2000; Rodrik, 2004). While definitions of industrial policy vary widely, they are usually bifurcated—either narrowly or broadly in scope.

In the case of a narrow definition, industrial policy emphasizes selected targeting of public policies that improve a country’s economy by positively influencing specific industry sectors or firms over others, thereby taking advantage of their superior productivity and global competitiveness. This narrow definition can include policies that stimulate the economic development of embryonic, emerging technology industries; the transference of new knowledge and “best practices” to enhance the global competitiveness of mature, slow growth industries; or to support efforts to maintain employment and existing companies in declining industries. During the latter half of the 20th century, there have been several specific examples of public policy applications of this narrow definition of industrial policy embraced by national governments, focusing on direct subsidies, tax credits and deductions, and knowledge transfers to a range of industry sectors, including agriculture, automobiles, steel, telecommunications, and synthetic fuels, with varying degrees of long-term, economic success.

The broad definition of industrial policy focuses on government interventions, such as public programs, and private-sector institutional relationships that support the nation’s general economic development and international competitiveness. Such government interventions can support multiple or specific economic goals, including increasing exports or research and development spending, improving labor-management relations or primary education, updating manufacturing production technology, and strengthening business and civic cultural patterns of cooperation. However, due to the broad nature of policies promoting national industrial growth and efficiency in the economy that are included in this definition, it loses much of its usefulness as a basis for public policy discussion.

European and Asian country examples, involving formal and elaborate typologies of industrial policy, have proliferated globally. In Great Britain, for example, the national government instituted industrial policies (through public-private planning) to improve its declining productivity and market share of global trade, consolidations to improve competitiveness in existing industries, targeted domestic firm public procurement preferences, and provided direct subsidies for both declining and emerging industries. In addition, in Germany, the federal government instituted industrial policies to provide significant subsidies and a guaranteed domestic market to existing industries, such as coal, steel, and shipbuilding. Moreover, the German government has supplied subsidies, project grants, and tax incentives to support emerging biotechnology, computer, aerospace, and nuclear energy industries.

In Japan, the Ministry of International Trade and Industry (MITI), a national government agency, targeted its planning efforts on a number of critical industries, including automotive, petrochemicals, heavy electrical equipment, nuclear energy, and computers and semiconductors, whose advancement the government believed was imperative for the nation’s future economic success. Japan, through its industrial policies executed by MITI, assisted firms (in narrow segments of these targeted industries) in capturing global market share through the granting of tax incentives, special depreciation rules, government-funded research assistance, and direct financial subsidies.

In 2006, the Japanese government launched the “Innovation 25” project to develop a strategic policy roadmap for the next two decades (U.S. Department of Commerce, 2009). According to the “Innovation 25” strategic policy roadmap, for the nation becoming a truly innovative society, Japan’s national policies and corporate strategies must be internationally credible, science-based, not precedent based, and the assessments, reasoning, and valuation of public versus private investments and cost-effectiveness must be documented (U.S. Department of Commerce, 2009).

The United States, however, has applied industrial policy in an inconsistent manner. Examples of this industrial policy inconsistency include loan guarantees for the Lockheed Corporation (aerospace industry) and the Chrysler Corporation (automobile industry) in the 1970s; the liquidation of savings and loan associations (financial services industry) in 1989; and direct federal government financial assistance (loan and loan guarantees) for the airline industry after the terrorist attacks in New York City and Washington, DC on September 11, 2001 (Payne, 2008).

What Is National Industrial Strategy?

National industrial strategy is an evolution of 20th-century industrial policy. Unlike traditional 20th-century efforts at industrial policy (which focused on public policy efforts to maintain domestic primacy of declining, older industries), national industrial strategy recognizes (and generally accepts) the international global economy as a foundation of competition. Most important, national industrial strategy focuses on technologically emerging industries as well as the national government working collaborative in a partnership with these emerging industries to meet future growth challenges and opportunities. Another aspect of national industrial strategy involves the recognition of themes or challenges that will drive the implementation of the strategy for a period of years into the future.

For example, in the U.K.’s national industrial strategy, the government has identified four “Grand Challenges” that they believe will transform their society from 2030 through 2040 (HM Government, 2017):

To meet these challenges, the U.K.’s industrial strategy’s aspiration is to embed AI across the nation, create thousands of quality jobs, and drive economic growth. It will harness technological innovation to meet the needs of an ageing society, by ensuring that people can enjoy at least five extra healthy years of life by 2035. Moreover, the national industrial strategy focuses on maximizing the advantages for U.K. industry by leading the world in the development, manufacture, and use of low carbon technologies, systems, and services that cost less than high carbon alternatives (with the goal of halving the energy use of new buildings by 2030). Last, under the national industrial strategy, the United Kingdom will become a world leader in shaping the future of mobility—in how it moves people, goods, and services around the nation driven by extraordinary innovation in engineering, technology, and business models. The U.K. government’s goal is to be at the forefront of design and manufacture of zero emission vehicles, with all new manufactured cars and vans effectively zero emission by 2040.

In Germany, the government’s national industrial strategy has identified four distinctive objectives—all based in an integrated national and European industrial strategy (Bundesministerium fur Wirtschaft und Energie, 2019). First, the Federal Ministry for Economic Affairs and Energy has established a goal that the gross value-added share of manufacturing (across all key industrial areas) should increase to 25% (from its exiting 23% share) in Germany and 20% in the European Union by 2030. Second, value-added supply chains should be located entirely within the European Union, with the strengthening of small- and medium-sized manufacturing companies of central importance. Third, the German government’s focus is on creating national and European industrial champions. Consequently, both European and German competition law (as it relates to mergers and acquisitions) must be reviewed and amended (where applicable) so that international competition remains possible for German and European companies. Fourth, to defend against risks to national security, Germany and the European Union should prevent acquisitions of state-owned or heavily subsidized firms by foreign investors. Last, the Federal Ministry for Economic Affairs and Energy advocates state financial assistance through its support of developing syndicates specifically targeted to battery cell manufacturing.

For the Saudi Arabian government, its national industrial strategy establishes five major objectives reached by 2030 (Ministry of Energy, Industry and Mineral Resources, 2018):

Moreover, the government’s National Industrial Development and Logistics Program is a focal program intended to transform Saudi Arabia into an industrial leader and a global logistics hub, focusing on the industrial, mining, energy, and logistics sectors. In addition, the Saudi Arabian government intends on developing a National Renewable Energy Program that helps create a renewable energy industry that encourages public–private partnerships and allows the private sector to purchase and invest in renewable energy opportunities.

National Industrial Strategy: Why Now?

As mentioned earlier, a major impetus for the development of these emerging national industrial strategies is the “Made in China 2025” strategy of reinvigorating Chinese manufacturing and reinforcing planning (State Council, 2015). Unlike the United Kingdom, which has a liberal market economy that has the bulk of the production process taking place in a decentralized manner, or Germany, which has a coordinated market economy where private information is exchanged through non-market institutions such as unions and business associations, the PRC operates using state-guided capitalism, where the national government decides which sectors will grow (Jahan & Mahmud, 2015). Interestingly, the PRC’s “Made in China 2025” initiative draws its inspiration from Germany’s “Industry 4.0” plan, focused on intelligent manufacturing, and adopted in 2013 by Germany (Center for Strategic and International Studies, 2015).

According to the PRC’s national industrial strategy:

Moreover, while there is a significant role for the state to play, China’s industrial strategy also relies on market-based institutions, including strengthening IP rights for small and medium-sized firms, using IP in business strategy, and actively participating in international technology standards-setting processes. In addition, the industrial strategy focuses on 10 priority sectors: advanced IT, automated machine tools and robotics, aerospace and aeronautical equipment, maritime equipment and high technology shipping technology, state-of-the-art rail transport equipment, electric vehicles and equipment, power equipment, agricultural equipment, new materials technology, and biopharmaceuticals and medical equipment.

China’s “Made in China 2025” national industrial strategy has attracted the attention of the U.S. Congress. In February 2019, the U.S. Senate Committee on Small Business and Entrepreneurship (Glaser, 2019) released a report that evaluated the “Made in China 2025” national industrial strategy. The Senate Committee recommended a U.S. economic policy framework responding to the political economy challenges of the “Made in China 2025” industrial plan. This policy framework includes enacting strategic U.S.-China capital flow restrictions and corresponding defensive measures for domestic industries targeted by the PRC industrial strategy. The Senate Committee report also recommends prioritizing new economic development, including encouraging physical investment and discouraging unproductive arbitrage through the federal tax code, and using development assistance from the Small Business Investment Company and Small Business Investment Research programs. Last, the report recommends considering labor market stabilization policies to support ongoing American employee attachment to the labor force and accumulation of valuable skills.

Whether this proposed economic policy framework becomes a formal U.S. industrial strategy is still up for debate. Yet in this report, the “central conclusion is that the U.S. cannot escape or avoid decisions about industrial policy.” In fact, the United States has implicitly pursued an industrial strategy focused on developing the financial services, IT/software development, and biopharmaceuticals industries, with public policy support coming in the form of tax code benefits and IP rights protection, as examples. Whether explicit or implicit, national governments worldwide are structuring the rules that affect their national marketplaces and one should expect that additional nations will be actively developing their national industrial strategies in coming years to meet the challenging resulting from increasing global national competitiveness initiatives.