Abstract
Because protectionism is now less relevant for supporting learning and innovation, development banking has assumed a greater role in industrial policy. This chapter presents the economic reasoning as to why state-sponsored development banking corrects market failures and creates productive capacities. Drawing on case studies, it explores how development banking enhances firm capacities to learn and innovate while also enhancing the technical capacity of state bureaucracy to design and monitor state support of industrial policy. The chapter makes an original contribution, discussing why and how economies that encourage or mobilize diversified sources of long-run finance (rather than relying on one state-owned development bank) enhance the effectiveness of their industrial policies. Finally, it examines one of the world’s largest and well-run national development banks, the Brazilian Development Bank (BNDES). This case study is useful for emphasizing the broader political economy and macroeconomic context in which national development banking takes place.
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