Weekly Business Insights from Top Ten Business Magazines | Week 309 | Shaping Section | 3

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 309 | August 11-17, 2023

The New Era of Industrial Policy Is Here

By Willy C. Shih | Harvard Business Review Magazine | September–October 2023 Issue

Listen to the Extractive Summary of the Article

Industrial policies are not new. Countries have long practiced them coupled with loans, grants, subsidies, and other financial tools to: foster growth the manufacturing sector (Japan); to modernize technology (China); to stimulate modernization and development (South Korea, Singapore, and Taiwan); and the United States the Apollo space program and the work of the Defense Advanced Research Projects Agency (DARPA) are examples of mission-oriented industrial policies that successfully stimulated innovation. Yet over the last few decades, critics have questioned whether such interventions were the most efficient way to allocate public resources. Failures to achieve objectives, perceived anticompetitive effects, concerns about crowding out private investments, and the view that programs often ended up serving special interests all fueled the skepticism. And high-profile failures pushed the pendulum swung the other way; many governments intervened less.

During the past five years, the pendulum has been swinging quickly back, propelled in part by the need to respond to global societal challenges such as the Covid-19 crisis and climate change. In addition, many countries fear that their strategic technologies or sectors are weakening, which poses a threat to economic growth, national security, and innovation capacity. Some new industrial policies focus on creating jobs; others on influencing international trade. Sometimes governments intervene because the private sector may not be willing to assume as much risk as governments when it comes to providing public goods.

A more controversial, and increasingly common, type of intervention focuses on helping specific industries or sectors.  And successes such as China’s support for EVs have encouraged governments everywhere to intervene more in technology-focused and mission-oriented industrial strategies.  Industrial policies have also begun to spill across national or supranational borders (like the EU) with the emergence of new alliances and concepts like friend-shoring, or the sourcing of materials and components from trusted trade partners. 

Friend-shoring and industry-specific trade alliances add another challenge for companies that operate across borders: Executives need to understand not only the competitive dynamics of potentially unfamiliar markets in other countries but also the possible impacts of policy decisions in countries with competing sectors.

As new policies are formulated and implemented, business leaders can take following steps to position themselves wisely:  recognize the different forms of industrial policy (horizontal, vertical, supply-side, and demand-side), understand competing priorities and government intent,  engage and educate, collaborate, adapt, decide whether to accept subsidies, plan to live without subsidies or preferences in the long term.

3 key takeaways from the article

1. We are moving into a new world order, where governments around the world are increasingly using industrial policy tools to shape where companies structure and locate their operations, which products they sell, and to whom they sell them. 
2. For companies that operate in multiple countries, navigating those policies won’t be easy. Managers need to understand the goals of the governments, work to educate government officials and staff to shape policies as they are being developed, and figure out how to optimally revamp their operations accordingly. 
3. Corporate strategies built during what we will probably look back on as a golden age of globalization will have to be recast for a more fragmented world, taking into account different country contexts and constraints and tailoring approaches that fit these markets. It will be much harder to have one size fit all.

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Topics:  Industrial Policy, Nation’s Competitiveness, Subsidies