Is there still a role for direct government support to firms in developing countries?

Abstract

Should governments in developing countries directly support firms with policies such as grants, subsidized loans, and training and consulting programs, or should they instead just aim to enact sensible regulatory and macroeconomic policies and not attempt to engage in industrial policy? While industrial policy has gained renewed attention in developed economies, it faces considerable skepticism in developing countries scarred by previous experiences and facing limited fiscal space. I discuss the rationale for government involvement, and then lessons from a recent research agenda in development economics on how to target these programs, on whether they induce firms to undertake additional activities, on avoiding political capture, and on how these interact with competition. This work shows that these policies can deliver some of their promised benefits, but that there is still much to learn and the need for systematic and serious attempts at prospective impact evaluation as new policies are launched.