Industrial policy has gained prominence in policy discussions across OECD countries. Recent policy announcements point to a rapid rise in the use of industrial policy instruments worldwide, with the number of newly announced measures increasing significantly over the past decade. While governments have always supported businesses in various ways, industrial policies were often viewed with caution. Poorly designed measures may encourage rent-seeking, protect incumbents or ailing firms, hinder innovation, and distort competition or trade.
Today, the context is changing. Many governments face a set of complex and interlinked challenges that traditional horizontal policies alone cannot fully address. The development and deployment of emerging digital and clean technologies require major investments and greater coordination to accelerate energy security and the uptake of new technologies. The COVID19 pandemic and geopolitical tensions have highlighted vulnerabilities in global supply chains and increased attention to resilience. Economic security has risen on the policy agenda, particularly for critical technologies and sectors such as semiconductors, and critical raw materials. This new wave of industrial policy encompasses a broad set of instruments and tools, from innovation support and regulatory frameworks to investment in skills, infrastructure and technology diffusion.
Concerns about the risks of industrial policy have not disappeared, but the perceived costs of inaction have increased. Productivity growth has slowed in many economies, and the gap between frontier firms and lagging firms has widened. In many countries and industries, competition has weakened over the past two decades, with market power increasingly concentrated among a small number of countries and firms. Business dynamism, often measured through new firm entry and job reallocation, has also declined. In this environment, well-designed industrial policies are increasingly seen as potential tools to encourage market entry of new firms, promote competition and innovation, reduce the risk of economic coercion, and support the creation of new markets.
Industrial policy includes a diverse set of instruments that work through different transmission channels, as reflected in the OECD’s taxonomy (Figure 1). Importantly, these instruments are not only vertical sectoral interventions but also horizontal, framework conditions (such as well-functioning capital markets, labour mobility, trade policy).
Some of the tools available to policymakers operate on the supply-side of the economy. These instruments aim to strengthen firms’ capacity to invest and include familiar measures such as grants, tax expenditures and financial instruments. In addition to these are a broader set of instruments to improve access to inputs, including skills and training programmes, public research and development, in addition to investments in enabling infrastructure. In parallel, governments can influence supply-side conditions (horizontal instruments) through competition policy, tax rules, intellectual property regimes, and measures that enhance the overall business environment.
Other instruments act on the demand side, shaping market conditions and encouraging the uptake of new technologies or higher standards. These include tools such as public procurement, which can create lead markets for innovative products, and product regulations or standards that guide consumers and firms toward new and innovative solutions.
