Should industrial policy guide our capital allocation?

Industrial policy had been relegated to the storeroom as free market thinking swept the world after 1980. It is now back in the reckoning. Industrial policy is essentially state intervention to shape the structure of an economy—rather than its growth rate—according to national priorities. It is thus more about the steering wheel rather than the accelerator, delivering direction rather than speed. Also, industrial policy tries to correct market failures, while economic reforms in recent decades have been more focused on government failures.

- NIRANJAN RAJADHYAKSHA

The renewed spread of industrial policy was still recently more a belief than an empirically established fact. That is now changing. For example, economists Reka Juhasz, Nathan J. Lane, Emily Oehlsen and Veronica C. Perez trained a large language model to trawl through government policy documents to measure the spread of industrial policy across the world. They found that the number of industrial policy interventions went up by an astonishing 30-fold from 2010 to 2022. This includes broader national industrial policies as well as those targeted at specific firms.

Industrial policy is likely to grow in importance as the world economy fragments, thanks to the rise of protectionism. Rising geopolitical tensions will add to its attractiveness. In an unstable world, major countries would want to build domestic capacity in strategic sectors, though hopefully not succumb to the hubris of trying to do everything at home. Given its rising popularity, it is important to examine industrial policy through a critical lens. A good place to start is to learn from a tale of two carmakers.

The South Korean conglomerate Hyundai began life as an infrastructure company, but made a bold move into car production in the second half of the 1960s. Nearly two decades later, the Malaysian government backed its own national car project to manufacture the Proton. The two initiatives had very different trajectories.