Technological Disruptions, GVCs, and Industrial Policy

This chapter examines the impact of technological change on global value chains (GVCs) and what initiatives and instruments governments in advanced economies can deploy to support firms and people during the transition. Drawing on an emerging debate on de-globalization, we discuss how global production is slowly shifting from being organized in GVCs to continental platforms with shorter and geographically closer relationships as firms seek to co-locate manufacturing and innovation activities. This offers regions and places the opportunity to upgrade and transform their economies and thereby to anchor high-technology industries, leveraging industrial legacy with frontier technologies. We will discuss the implications for a transformative place-based industrial policy that aims to connect embedded industries to new technologies; to repopulate embedded industries with new firms and start-ups, and to use regulation and procurement to create new markets and allow exploration.

Macro-Policy, Labour Markets, and Industrial Policy

Debates on industrialization and industrial policy have historically had a supply-side bias: development planners focused on strengthening inter-industry linkages, mobilizing savings to finance investment, and the accumulation of technological knowledge. Aggregate demand was expected to accommodate and even facilitate the structural change brought about by the industrialization process. However, botched industrialization experiences in South East Asia, Latin America, and Africa demonstrate that failures to manage demand in ways supportive of industrial policy can slow or even derail industrialization. We use an open-economy growth model of a late industrializing economy, featuring cumulative causation and a (long-run) balance-of-payments constraint, to investigate conflicts and complementarities between macroeconomic and industrial policies. We identify key macro mechanisms that undermine industrialization processes—and highlight macro policies in support of industrial diversification, structural change, and upgrading. We close by arguing that from a macro point of view, the widely held claim that labour laws are a ‘luxury’ developing countries cannot afford, is wrong. Labour regulation and higher real wage growth, when given adequate macroeconomic policy support, can be made to further industrialization.

European Industrial Policy

This chapter examines industrial policy implemented in European countries across time, especially after the Second World War and in recent years. It briefly shows that industrialization never occurs without strong supporting industrial policy to provide the enabling conditions for the deep structural changes involved, such as infrastructure and capabilities, especially human capital. Industrialization in the eighteenth and nineteenth centuries is associated with the creation and consolidation of nation states, leading to national perspectives on industrial development and industrial policy, at the expense of regional imbalances. After the Second World War, three phases of industrial policy take place: strong and selective intervention in the first three decades of the period, market-led approaches in the 1980s and 1990s, and a more pragmatic approach at the turn of the century, where deep structural changes require industrial and institutional adjustments. With globalization and the emerging new technological paradigm of Industry 4.0, innovation and skills, as well as the territorial roots of industrial development, seem to be important aspects of industrial policy today. The chapter also argues that the multilevel governance policy framework has to adapt to current disruptions, particularly in Europe.

Post-war American Industrial Policy

Why did the post-war US industrial heartland suffer severe de-industrialization despite its pivotal and recent contribution to the victory of the Allies in the Second World War? This is the question that motivates my chapter. The argument is that the US manufacturing system that won the war came under threat from two existential challenges. The first was the emergence of more advanced production systems abroad, exemplified by Japan and Germany. But the second and more important challenge was a historical shift in the nation’s economic policy framework. With the 1980’s, triumph of neo-liberalism, the regulatory framework and manufacturing infrastructures that had engineered the nation’s industrial heartland, won the war, and fostered innovation, were eroded and ultimately dismantled. Neo-liberalism is a policy framework with roots in the extractive industries of the South. Plantation owners and employers who use unskilled labour in mines, lumber, and textiles are always opposed to anything that would raise wages or taxes. What was new in the 1980s was the triumph at a national level of a neo-liberal economic discourse and anti-government policy framework that had hitherto been limited to the South.

Industrial Policies in the BRICS

This chapter discusses industrial policy in the BRICS. It contributes to the literature in three ways. First, by approaching the BRICS as a single entity, it documents the gradual buy-in to the concept of BRICS by the participating countries, and their efforts at strengthening collaboration, including on industrial development matters. Second, it corroborates that differences in individual development paths influence the expected contribution of each member to advancing a joint industrial development agenda, while it is early to dismiss their ability to consolidate as a major player in global economic dynamics. Third, the BRICS response to the Fourth Industrial Revolution builds on their traditional proactive stance around industrial policy, while their expected collective collaboration with third-party regions, particularly Africa, reflects cumulative interests at the individual country level.

National Champions, Reforms, and Industrial Policy in China

China’s economic reforms since the late 1970s have been characterized by a combination of market-oriented transition and persistent practices of statist industrial policy. A key dimension of China’s industrial policy is to transform and consolidate the backbone of its large state-owned enterprises sector into a group of globally competitive big businesses. The rise of China’s ‘national champions’, defined here as the giant central state-controlled corporations, business groups, and financial institutions in the ‘commanding heights’ sectors, has reshaped the landscape of China’s business system. This chapter reviews the origin and evolution of China’s national champions industrial policy. It examines how the Chinese state has restructured the core assets and enterprise units from the socialist command economy into a set of large state-controlled corporations and business groups viable in a predominantly market-oriented environment. This process has been driven by continuous organizational learning and capability building at both the government and enterprise levels. The current governance regime of China’s national champions can be characterized as a networked hierarchy that interweaves multiple mechanisms of institutional bridging and reciprocal control. Despite their remarkable size and growth, China’s national champions are still at an early stage of developing their international competitiveness.

Diverse Tools of Industrial Policy in Korea

The chapter presents a Schumpeterian and capability-based view of industrial policy, reflecting upon its practices in Korea over the last several decades. Given that it is typical for many developing countries to suffer from capability failure, industrial policy should go beyond correcting market failure and aim at overcoming capability failure. It is not about picking winners but about picking good students and allowing them time to learn and build capabilities until they are able to compete with incumbent firms from developed countries. This chapter discusses specific industrial policy tools practised in Korea at different stages of its development: tariffs to protect infant industry; technology import licensing to promote building of absorptive capacity; entry control guaranteeing rents for fixed and R&D investment; and public‒private joint R&D to break into higher-end products and sectors. While these tools look different in their concrete contents, they all allow some rents for the targeted sectors, which can be used to pay for building production capabilities in the case of tariffs or technology licensing in the 1970s, investment capabilities in entry control in the 1980s, and technological (R&D) capabilities in the case of public‒private joint R&D in the 1990s.

Managing Trade through Productive Integration

This chapter reviews the debates around trade and industrial policy and discusses how the composition of trade and investment flows, as well as the spread and form of participation in GVCs, affects structural transformation. It focuses on three characteristics that have been identified in the literature as critical to assessing the export structure of an economy and its potential to accelerate industrialization: the diversification of production, the level of sophistication of the exported products and upgrading of productive capacities/capabilities required to sustain the production and export of increasingly sophisticated goods, and the establishment of linkages within and across sectors. The chapter also discusses the critical components of a national export strategy which could support the insertion of national firms in international markets, adopt a strategic approach to attracting FDI and enable constant upgrading along global (and regional) value chains. Because, success comes not simply from shifting resources from primary activities to labour-intensive manufactures but also anticipating future challenges in these industries (as costs rise and new competitors emerge) and nurturing new linkages and more sophisticated products. An effective national export strategy depends on active industrial policies, targeted support for upgrading, and regional economic arrangements.

Latin American Industrial Policies

This chapter analyses the evolution of industrial policy in the four largest Latin American economies—Brazil, Mexico, Argentina, and Colombia—using Korea as a benchmark. Three phases in industrial policy and industrial transformation are identified: a period of state-led industrialization between the end of the Second World War and around 1980, which came to an end with the debt crisis of the 1980s; the 1990s, when the region abandoned industrial policy and embraced the structural reform agenda; and the commodity boom after 2004, when the region witnessed a timid return of industrial policy, while at the same time world demand favoured the reprimarization of its export structure. The outcomes of these policies in terms of building technological capabilities and diversifying the industrial sector towards knowledge-intensive activities, are analysed using different indicators. The importance of the interactions between structural change, industrial policy, and macroeconomic policies (especially exchange rate and capital account management) are highlighted.

The Theory and Practice of Industrial Policy

This chapter reviews the theory and practice of industrial policy, focusing on three key themes. First, it presents industrial policy as a vehicle by which manufacturing (and other dynamic and high-productivity services and agricultural activities that share technological and linkage spillovers) drives structural change. It also underlines the strategic role of exports, especially as a source of international learning and relaxing balance-of-payment constraints. Second, it examines industrial policy as a conduit of technological catch-up, and emphasizes the centrality of technological learning and the development of technological and innovation capabilities for economic catch-up and sustained economic growth. Finally, it reviews the origins, the dynamic and adaptive nature of industrial policies, and the unevenness and variations in policy design and outcomes. The chapter draws primarily from structural development economics and evolutionary economics, and includes a wider scan of the literature. It provides the groundwork for subsequent chapters that examine theoretical perspectives and connections, and experiences from advanced, emerging, and developing countries.