Industrial policy interventions have gained increased attention in OECD countries, but there is a lack of consensus on their effectiveness. This paper reviews the empirical literature on the effectiveness of industrial policy instruments, using a new analytical framework developed in a companion paper. The paper highlights the effectiveness of well-designed economic incentives for firms and favorable business environment conditions. However, the evidence on targeted and demand-side instruments is limited and inconclusive. Additionally, the paper emphasizes the importance of complementing economic incentives with other interventions, such as skill policies and framework conditions, including competition and trade policies.
Industrial policy interventions aim to promote structural change and accelerate economic growth by supporting the development of specific sectors or industries. Despite the growing attention towards industrial policy, there is a lack of consensus on its effectiveness. This paper reviews the empirical literature on the effectiveness of industrial policy instruments and presents a new analytical framework for industrial policy, developed in a companion paper.
Effectiveness of Economic Incentives and Framework Conditions: The literature strongly supports the effectiveness of well-designed economic incentives for firms, such as tax incentives or subsidies. Such incentives can promote innovation, R&D investment, and productivity growth. Additionally, favorable framework conditions, such as stable institutions, efficient regulations, and access to finance, are important in enabling the most productive firms to grow and facilitating structural change.
Effectiveness of Targeted and Demand-side Instruments:
In contrast, the evidence on targeted and demand-side instruments, such as public procurement, export promotion, or local content requirements, is limited and inconclusive. While some studies find positive effects, others report no significant impact or even negative effects. The effectiveness of these instruments may depend on contextual factors, such as the degree of market competition, the level of institutional capacity, and the specific design of the policy.
Complementarities between Industrial Policy Instruments:
The paper emphasizes the importance of complementing economic incentives with other interventions, such as skill policies or framework conditions, including competition and trade policies. Skill policies, such as education and training programs, can enhance the capacity of firms to innovate and compete in global markets. Framework conditions, such as competition policies and trade policies, can reduce market distortions and facilitate trade and investment flows. Moreover, industrial policies should be designed in a coherent and consistent manner with other policy areas, such as innovation, entrepreneurship, and regional development.
The effectiveness of industrial policy instruments depends on a range of contextual factors, including the design of the policy, the degree of market competition, the level of institutional capacity, and the complementarity with other policy areas. While economic incentives and favorable framework conditions are effective, the evidence on targeted and demand-side instruments is limited and inconclusive. Policymakers should carefully consider the contextual factors and design policies in a coherent and consistent manner with other policy areas to maximize their effectiveness.