By Julia Pamilih
The stereotypical image of innovation policy is big subsidies for researchers at universities or high-tech firms, but the truth is more complicated. The process of creating and distributing innovations varies greatly around the world, as does the role of policy.
The panel on Industrial Policy for Innovation featured Barry Naughton; So Kwan Lok Chair of Chinese International Affairs at UCSD’s School of International Relations and Pacific Studies; Chiara Criscuolo, Principal Economist at the International Finance Corporation; Ernesto Stein, Distinguished Professor in Public Policy at Tecnológico de Monterrey; and Munseob Lee, Assistant Professor of Economics, UCSD School of Global Policy and Strategy. The panel was moderated by Jie Bai, Assistant Professor in Public Policy at Harvard Kennedy School. Here are some of our main takeaways from the discussion.
- Market failures are the traditional rationale for industrial policy, but the reality is often broader strategic objectives
While market failures such as knowledge spillovers and information asymmetries are the traditional rationale for industrial policy, the panelists highlighted other drivers including strategic objectives and mission-oriented policies. In Europe, Criscuolo noted that green innovation poses additional challenges, with low-carbon technologies requiring market-shaping policies and the challenge of “lock-in” effects from technology development.
The Chinese and South Korean industrial policy experience was not primarily framed around market failures but broader objectives like technological catch-up, although governments sometimes adopt ex-post framing of market failures. Naughton divided China’s industrial policy journey into three phases: opportunistic selection of promising sectors (from 2006), innovation-driven development (from 2014) and self-reliance (from 2019). He noted that these three phases encompass a wide range of policy rationales.
- Even if we can identify the market failure, the devil is in the details of policy design - balancing adoption of existing tech versus pushing innovation frontiers is a key question
Even where clear market failures are identified, badly designed policies can exacerbate problems. Criscuolo discussed how the detail and mix of policies (tax incentives, direct funding, IP regimes) significantly impact outcomes. For example, R&D tax incentives have about compared to basic and applied research. Good governance, transparency, and state capacity are essential for effective execution.
Lee explained how from 1966-1979, South Korea focused on technology adoption, with reliance on Japan’s willingness to share technology. From the late 1970s, export-oriented domestic companies invested their profits in R&D, and from 1982, the government shifted tax benefits from adoption to innovation-focused R&D tax credits.
- Lobbying and political capture are a threat to industrial policy
Criscuolo highlighted the risk that R&D tax credits end up helping existing incumbents with large market share, while Stein noted Latin America’s history of protecting uncompetitive sectors through tariffs rather than an innovation focus. While there are success stories in agriculture, such as Argentina’s , he highlighted the need for tools to analyze policy impacts and guard against lobbying and capture.
- China’s industrial policy journey has become interventionist, but the evidence is complex
Naughton discussed how China’s government has intervened far more in the nuts and bolts of the economy . But he cautioned restraint in the discussion of China’s state-led model, given we have seen many examples of clumsy government policy redeemed by a responsive and entrepreneurial private sector. Openness has been essential, given China’s industrial success stories - solar panels, EVs and batteries - all originated from merging Chinese low-cost conditions with technology breakthroughs made abroad. Steadiness and long-term commitment have also been important. Electric vehicles were an industrial commitment over 20 years, with “enormous waste and extraordinary failures.”
