There is a global adoption of industrial policies that incentivize domestic manufacturing to create jobs and back shoring of the value chains. This is an effort to improve the performance of key manufacturing and business sectors and has been highlighted greatly after the COVID-19 pandemic and is a shift towards the real economy comprising jobs, production, and localization. This approach has been termed ‘productivism’ by Dani Rodrik, a Turkish economist, and Harvard Professor.

Industrial policies are achieved using tools such as subsidies, tax incentives, infrastructure development, protective regulations, and research and development support. An example of such a policy in Kenya is the National Industrialization Policy Framework for Kenya (2012-2030). This policy framework focuses on value addition for both primary and high-valued goods and linkages between industrial sub-sectors and other productive sectors to drive the industrialization process and aims at providing strategic direction for the sector’s growth and development. The comprehensive policy objective is to enable the industrial sector to attain and sustain an annual sector growth rate of 15% and make Kenya the most competitive and preferred location for industrial investment in Africa leading to high employment levels and wealth creation.

These are the guiding principles of the industrial policy:

1. a)       Productivity and competitiveness
2. b)     Market development
3. c)       High value addition and diversification
4. d)     Regional dispersion
5. e)     Technology and innovation
6. f)       Fairtrade xiii practices
7. g)       Growth and graduation of MSMIs
8. h)     Employment creation
9. i)       Environmental sustainability
10. j)       Compliance with the current Constitution
11. k)       Education and human resource development.

 On the other hand, the challenges facing this sector are:

1. a)       Low value addition
2. b)     Inadequate market information resulting in limited market access and a narrow export base
3. c)       High cost of infrastructural services leading to lack of competitiveness
4. d)     Inadequate skilled industrial human resource
5. e)     Limited access to affordable long-term finance
6. f)       High cost of industrial land
7. g)       Limited industrial subcontracting linkages
8. h)   Influx of counterfeit, dumping and substandard goods thereby reducing production capacities
9. i)       Limited technology transfer
10. j)       Low attraction of local and foreign direct investment

The objective of an industrial policy may conflict with that of a competition policy. Governments in the past have given priority to industrial policy at the detriment of fair and free competition in the market. At the same time, it is important to note that competition and industrial policies should complement each other for building a successful economic system.

The link between industrial policy and competition law

No country has been able to sustain growth or reduce poverty without the manufacturing sector driving that growth. The productivity levels in industry are much higher than in either agriculture or services. Manufacturing is the engine of economic growth, as it offers economies of scale, embodied technological progress, and generates forward and backward linkages that create positive spillover effects in the economy. Moreover, it is employment-led growth.

Therefore, economic development is complemented by a sound industrial base. Industrial policies are major cornerstones of a country’s economic policy. In the same vein, competition policy aims to ensure that market practices and strategies do not reduce consumer welfare. Competition policy aims to protect and promote competition in the market. Effective competition policy removes market entry barriers imposed by incumbent players. It provides innovation incentives to new entrants who want to improve their market position and increase their customer bases. It also encourages the existing market players to innovate and protect their market share from competitors.

This means that competition policy fosters innovation which leads to better-quality products and services being offered at a competitive price, thus increasing both consumer and producer welfare. Competition law was deemed the most appropriate and least intrusive way of regulating markets.

While competition provides increased incentives for firms to innovate, industrial policies can help by improving their capacity to undertake growth-inducing investments. A successful model of industrial development thus needs both, competition as the basis, and carefully designed industrial policies on top of that, without violating competition rules. Industrial policies are more likely to be successful when they are implemented in markets of some optimal degree of competition.

However, even in a competitive environment, there might be market imperfections that impose constraints on investments in innovation and growth. Then, there is a need for industrial policies that can remove these constraints and motivate investments. Such impediments may arise due to capital-market imperfections and credit constraints, administrative burdens, or complicated labour or tax rules.

Well-targeted industrial policies can provide, for example, tax incentives for innovating firms, re-design the rules to reduce the administrative burden for innovators and relax credit constraints by protecting intangible assets.

Constraints may also limit the reallocation of firms towards new, growth-enhancing sectors (e.g., ICT, nanotechnology, biotechnology). If markets are competitive, state intervention can be more effective in providing some assistance to firms to enter and scale up in these sectors. An important criterion for this complementarity model to be successful is that vertical industrial policies should not provide selective advantages to specific firms. Various countries have promoted specific firms or industries as national champions, such as semiconductors in Taiwan, renewable energy in Germany, and aerospace in France.

This approach aims to create globally competitive companies, ensuring economic growth and security. Although the use of industrial policy to establish national champions has been successful in some cases, it remains controversial. Economists worry that picking winners and losers can lead to market distortions and inefficient allocation of resources. In fact, sector-wide industrial policies that apply to many firms without discrimination will work better at inducing sustainable growth.

Indeed, picking a specific firm as the champion of the sector, instead of letting the market’s competitive process decide which firm will emerge as the leader, can be ineffective. This is because the government cannot assess the chances of commercial success better than the market (it may pick a winner that is not the most efficient). Also, the government’s selection process may involve the risk of capture and rent-seeking, especially if the selection process is not transparent and the rules of selection are not clear.

Case Studies

Despite the concerns, the revival of industrial policy shows no signs of slowing down. In the US, industrial policy is a priority of the government. There is bipartisan support for the Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS Act), which aims to revitalise the US semiconductor industry.

More than 90 percent of advanced chips, crucial for defence and artificial intelligence (AI), come from Taiwan which raises concerns about US industry vulnerability due to China’s presence. To address such risks, the US government is allocating $39 billion in funding from the $280 billion CHIPS Act to support the development of advanced semiconductor manufacturing capability. The Biden administration’s industrial policy is far-reaching, and at least two semiconductor manufacturing clusters are planned by 2030. Funding recipients also face extensive conditions, such as a 10-year ban on expanding advanced chip capacity in China and a commitment to affordable childcare.

These policies are part of the administration’s broader approach to industrial policy, which also includes $370 billion in subsidies for clean energy in the Inflation Reduction Act. The use of domestic content regulations on solar panels has also been authorised under the Buy America Act.

Meanwhile, Japan is providing subsidies worth more than $500 million to 57 companies to encourage them to invest domestically, as part of its efforts to reduce reliance on China.

Similarly, the European Union is scaling up its industrial policy, including setting aside €160 billion of its COVID-19 recovery fund for digital innovations such as chips, batteries, and climate adaptation.

In response to massive subsidies in the US Inflation Reduction Act, Italy’s economy minister recently called for a common EU approach to support competitiveness and protect strategic production.

India as well, with its recent manufacturing push  ‘Make-in-India’ for job creation is a part of the global trend. India’s new industrial policy has unfolded with ease-of-doing-business, production-linked incentives (PLIs), tariffs protection, and sectoral missions such as the Semiconductor Mission, and Gati Shakti, among many initiatives. India’s recent emergence as a net exporter of mobile handsets and toys gives confidence that the industrial policy can work. India’s past was dominated by an inward-oriented strategy for industrial development for almost 40 years after independence.

The main reason behind this was to foster industrialization and save foreign exchange. The developments since then clearly prove that the industrial policy of a country should not be an isolated matter that stands in conflict with other policy strands like trade policy, competition policy, monetary policy, fiscal policy, etc. Absolute clarity on the role of these policies and their ability to achieve convergence will be critical to achieving desired growth and employment in an economy.

It would be a mistake to analyse their interaction in isolation and without considering other important related policies, especially competition policy and monetary, fiscal, taxation, and sector-specific policies. A review of literature including IMF research suggests an industrial policy in the market economy which is not against or outside the markets, especially international Global Trade Liberalisation, and the Developing Countries.

Industrial policy must necessarily be part of an economy open to international trade. It should not impose constraints that expose companies to additional costs that would downgrade them in the domestic market or in international competition. A highly misunderstood aspect of industrial policy is that it ignores market mechanisms.

On the contrary, a good industrial policy intervenes in the domestic economy to kickstart a “virtuous cycle” of industrialization but then relies on market mechanisms to sustain it. We also look towards fair-market capitalism which offers a different path to achieving national security goals than the protectionist industrial policy approach. Instead of each country promoting national champions, the approach encourages a diversified global supply chain based on open and fair trade, thus avoiding an economic arms race. This approach can lead to greater efficiency and innovation in the long run while mitigating the risks of supply-chain disruptions through diversification and international cooperation.

Some of the insights are borrowed from Mr. Pradeep S. Mehta, Secretary General of Consumer Unity, and Trust Society.