Industrial policies in a new global scenario: The “permissible” and the

“practicable”

Since the late 1980s, the global playing field experienced an impressive process of transformation. Three main factors are responsible for this process. Firstly, the liberalization of international trade and capital flows has rendered the global economy increasingly interconnected, and has reduced the “political space”

needed to adopt industrial policies (Chang, 2007; Andreoni et al., 2018). Secondly, new powerful actors have emerged. They are the so-called “big businesses” – global giant firms that own impressive global market shares. Schumpeterian competition in oligopolistic markets has selected the most efficient and technological advanced global firms. Thirdly, the impressive technological revolution that has occurred in recent decades has reshaped production processes and has accelerated the emergence of large firms. Considering these dramatic transformations, the adoption of past industrial policies seems to today’s developing countries neither permissible nor practicable. In this section, we will analyse the way in which the process of trade liberalization, the rise of big businesses and the technological revolution have strongly affected the possibility for today’s developing countries to implement industrial policies to catch up to the level of large domestic firms. This analysis will lead us to argue that today’s developing countries cannot simply copy the industrial policies adopted in the past by today’s developed countries. Instead, developing countries should creatively learn from the past to invent and implement new industrial policies able to nurture their rising large firms.

The process of trade liberalization experienced a decisive acceleration in the 1990s.

Developing countries were convinced and sometimes constrained to reduce drastically the use of all those selective industrial policies that affect international trade. International organizations – i.e. WTO, IMF and World Bank – used many instruments in the establishment of the new international system of rules: WTO agreements, such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS); IMF’s structural adjustment programmes; and unequal bilateral and regional trade agreements. As a result, the “policy space” needed to nurture indigenous large firms through industrial policies is now drastically reduced

and many past industrial policies – i.e. quantitative restrictions on imports, or domestic content requirements – are not allowed anymore.

However, as highlighted in Andreoni et al. (2018), there are still some exceptions and industrial policies that are allowed, especially for LDCs in the transitional phase towards the new global market rules. Specifically, some selective policies widely used by today’s high-income countries – such as “skill formation, technology support, innovation financing, FDI promotion and targeting, infrastructure development for IT, and all general subsidies that do not affect trade performance”

– are still allowed (Lall, 2004:27). All these measures can strongly affect the availability and accumulation of technological capabilities in developing countries.

The fact that many LDCs do not implement these measures suggests that it is not simply a problem of permissibility but also of willingness. Knowing the real history of today’s developed countries could reduce this lack of willingness or awareness on the crucial role of industrial policies.

Nevertheless, the stronger challenge for today’s developing countries is not represented by the processes of liberalization discussed above, but prominently by the so-called “big business revolution” (Nolan, 2001). The emergence of global giant firms is at the same time the result and one of the main causes of the impressive technological revolution of these last decades. The analysis of these two strongly interconnected processes is a fundamental step to discuss the main strategies that today’s developing countries can use for nurturing – or more often allowing the “birth” – of their large firms.

During the 1990s, developed countries experienced a progressive process of industrial concentration at the level of the “global system integrators”. An impressive number of mergers and acquisitions in many sectors – i.e. aerospace and defence, automobiles, trucks, power equipment, oil and petrochemicals, pharmaceuticals, and banking – led to the emergence of global firms. These new global giants implemented a process of selection among the networks of their suppliers to increase their competitiveness in increasingly oligopolistic markets. In turn, the global giants’ selection of the best suppliers triggered a process of concentration at the level of the first-tier suppliers – i.e. the so-called “cascade effect”.

Today’s giant system integrators coordinate a global network of first-tier suppliers – i.e. the “external” firm – which constitutes the single business units of the global value chain. The strong connection between the global firm and the “external firm”

is not limited to price relationships, but includes many crucial activities of the network suppliers, such as new investments, process innovations and product development. In just a few years, the giant system integrators have erected high

barriers to entry into their industries. From more capital-intensive sectors to knowledge-intensive sectors, giant firms are consolidating their global market shares, investing in brands, efficiency and R&D. Their strategic investments in technological advancement have transformed many production processes so that, in many sectors, today’s developing countries cannot use low labour cost as a comparative advantage. For today’s developing countries’ large indigenous firms, the possibility to gain a place in the global value chain is strictly related to the availability of knowledge and the building process of technological capabilities.

To summarize, if the new international system of rules seems to leave some degree of freedom in the adoption of industrial policies, the big business revolution arises as the main challenge for developing countries’ process of catching up.

Undoubtedly, for today’s developing countries it is “more difficult and risky to take the autonomous route of Japan, the Republic of Korea or Taiwan Province of China”

of building large indigenous firms through industrial policies. However, developing countries should not be constrained in choosing between the neoliberal policies or the adoption of the past set of industrial policies adopted by today’s developed countries. Developing countries have the possibility to choose a third alternative, that is to develop their own new set of industrial policies for technological capability development. These new industrial policies must not only be permissible and practicable, in the new global context but, more importantly, must be congruent with the specific local needs and conditions that different developing countries are facing.

In conclusion, there is no “blueprint”, but only several inspiring examples from history and strong theoretical rationales for State intervention, as we have seen above. In the next chapter, we will discuss policy instruments and challenges associated with using industrial policies for building productive capacities.

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V. Building productive

capacities: