Institutions for Economic Development
Chapter 3: Industrial and Technology Policy
Policies to advance industry, innovation, and technology (which I group under the rubric ‘industrial policy’) constitute separate yet convergent domains. They are public tools that governments use to modify industrial structures, by either adding new sectors or renewing existing ones. Industrial policies have existed for several centuries, from Britain’s prohibiting export of wool in the sixteenth century in order to provide cheap and abundant raw material to its nascent textile industry to the German and U.S. governments restructuring their domestic automobile industries through massive funding and partial nationalization in the twenty-first century. Institutions to advance science, technology, and innovation (STI) are much more recent (I refer to them collectively as ‘STI policy’). Their first elements appeared in the nineteenth century, with publicly funded university research in Germany and agricultural research laboratories in Germany, the United States, and Canada. Patent legislation is the precursor of today’s STI policy. It overlaps both industrial and STI policies and has been in use in Britain and the United States since the late eighteenth century. This chapter defines the policies, provides historical examples of their use, and links them with economic development and catching up. 3.1 DEFINING THE DOMAINS Industrial policy is a set of government interventions that the wealthy nations have used during their industrial development (Lall, 2004; Reinert, 2007; Chang, 2003). Its main components include protective tariffs for infant industry, government procurement, direct subsidies for industrial investment, founding of public companies that government may later sell to the private sector, promotion of exports...
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