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What Is an Industrial Policy?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 17 August 2018
  • Copyright Protected:
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    Conjecture Corporation
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Industrial policy is the promotion of specific national industries to address market failures, promote economic wellbeing, and increase national security. It is an example of a government intervention policy makers may choose to take if they feel a national economy would benefit. Proponents of such policies argue they increase overall industrial strength and capability, and can promote the growth of domestic industries. Others believe they interfere with free market operations by creating artificial economic environments.

Nations that choose to use industrial policy as part of their overall governance strategy use reports on various national industries. These discuss major and minor industries, levels of success, and capabilities. Some may approach the issue from a specific perspective, like energy independence or a stable food supply. Documentation highlights areas where national industries are falling short of need or could benefit from attention, allowing officials to determine the best industrial policy decisions.

In an industrial policy, a nation can use a variety of measures to promote domestic industry. These can include incentives like tax breaks, grants, and trade protections to encourage companies to develop and grow. For example, a nation might put a high tariff on a particular kind of imported good, making it possible for domestic producers to compete with the prices offered by foreign manufacturers while they develop capacity and improve their quality. Likewise, companies might get tax credits for research and development to encourage them to expand their offerings.

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Penalties can also be incorporated into industrial policy. These can create an incentive in reverse by giving companies a good reason to avoid punishments. At the same time, funds generated from fines and other penalties may be used to fund grants and incentives, creating a self-sustaining industrial policy.

Advocates for this type of intervention argue that nations with nascent domestic industries may struggle to keep pace with international producers. Their companies cannot compete in terms of price and quality with experienced firms already in the market, which can leave them at a disadvantage. This may create a barrier to entry into the market. Industrial policy can be used to even the footing to encourage the development of domestic industries. The economy may benefit from domestic growth, and the nation also benefits from the domestic location of vital industries.

The argument that new industries need to be protected is not universally accepted among economists. Some argue that interventions like industrial policy can do harm in the long term. Measures like protectionism, for example, could be viewed as an unfair advantage for domestic firms and a penalty for foreign companies trying to expand.

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