Public policy and catching up by developing countries in global industries: a simulation model

Abstract

This paper examines the effects of different public policies (strengthening capability building, favouring firms’ learning, protectionism and support of entry of new domestic firms) on the catch-up of a latecomer with respect to an incumbent country in changing and uncertain technological environments. The effects of these policies are analysed with a simulation model first separately and then jointly to assess possible complementarities. We reach several results. First, we confirm that capability building and firms’ learning are important drivers of catch-up. Second, we find that when a large technological discontinuity takes place, entry support favours catch-up while protectionism has the opposite effect. Protectionism favours catch-up only when no technological discontinuity opens up. Third, we find that depending on the technological conditions, different policy complementarities exist; therefore, different policy mixes should be at the base of a country catch-up strategy. These results add to the previous literature on public policy and catching up by developing countries in an industry by distinguishing the different effects of various types of public policy and relating them to the technological conditions that are present in an industry.