Review of the Literature on the Theory of Industrial Policy

Abstract

There is no single, common agreed-upon definition of industrial policy. The nature and scope of industrial policies adopted by states has changed over time. Historically, national governments played a central role in the implementation of industrial policy by supporting infant industries, ‘picking the winners’ and investing large amounts of public money via the disbursement of financial subsidies to private companies. Nowadays however, mainstream economists agree that market mechanisms are essential for getting the relative price right and thereby facilitating efficient resource allocation. Notwithstanding this, in some cases governments can play a crucial role in facilitating industrial transformation. There are three ways for public administration to impact the behaviour of entrepreneurs, i.e., through a legal framework creating an administrative and legal environment favourable for economic activities; through a political climate supporting objectives defined by the government; and by offering financial assistance and tools to improve the position of selected beneficiaries. On one hand, industrial policy is treated as an equivalent to restructuring policy, i.e. one which helps change the structure of the economy and gives new impetus for growth and development. However, on the other hand it can be used to intervene in the market, thus disturbing competition. In both cases we can observe similar or even identical arguments for such opposite policies, but with the consequences for beneficiaries and their competitors understood in completely different ways. The main objective of this chapter is a review of the various definitions of industrial policy, as well as a presentation of arguments for and against industrial policy understood in the traditional way. To this end we analyse articles, chapters in books, and scientific papers to find out the main schools of industrial policy, their aims, goals and instruments, as well as the envisioned consequences to entrepreneurs and for the economy as a whole, including changes in the competitive position of beneficiaries, competitors and customers. In order to ensure clarity, thematic unity, precision, and a proper presentation of various approaches to industrial policy, the chapter has been prepared using original statements, phrases and quotations from over 110 publications, supplemented in some cases by the author’s own critical remarks and opinions.