Industrial policy, once a marginal topic, has moved to the center of global economic debate. The global financial crisis, the COVID-19 pandemic, and geopolitical rivalry have underscored vulnerabilities in supply chains and the need for greater economic resilience. Support for semiconductors, batteries, and renewable energy are the most visible signs, but industrial policy extends well beyond direct support to specific sectors.

A broad definition of industrial policy is any government support for firms or sectors aimed at boosting or reshaping economic activities. This encompasses horizontal tools such as tax incentives, training, or infrastructure investment, as well as targeted interventions in specific sectors, technologies, or regions. The objectives of these policies are diverse: stimulating productivity and innovation, fostering resilience, enabling technological upgrading, and steering structural transformation towards climate and social goals.

Classic rationales for industrial policy — information asymmetries, coordination failures, and positive externalities — remain central to its operation. But current imperatives, including the green transition, digitalization, and national security, suggest that modern strategies aim not only to fix market failures but also to shape markets and direct innovation towards under-resourced objectives such as renewable energy and quality jobs.

The risks are equally familiar.

Subsidies may entrench incumbents, distort competition, or crowd out private investment. These dangers are most acute where institutional capacity is weak, bureaucratic coordination is limited, or exit strategies are absent. This creates a paradox: industrial policy is often most needed in low-income economies, yet it is comparatively the hardest to implement there. Governance quality, safeguards against capture, and robust evaluation mechanisms determine success.

The effectiveness of industrial strategies — defined as coherent combinations of instruments to achieve productivity, resilience, and sustainability — depends heavily on the domestic context with three features standing out.

Institutional capacity is first. Strong bureaucracies can design adaptive, performance-based tools and adjust them iteratively. Weaker administrations often fall back on blunt and more distortionary measures such as tax holidays or local content rules.

Production networks also matter. Firms are interconnected through supply chains. Policies targeting central nodes — upstream suppliers of core inputs or downstream lead firms — can create spillovers and build resilience. These networks influence firm-level incentives and technology diffusion. Supplier upgrading, collaborative platforms, and partnerships with foreign investors can then spread technology and raise absorptive capacity among domestic firms.

For instance, supplier development programs linked to foreign direct investment have helped spread technological and organizational know-how to domestic firms. Evidence from Latin America and Asia shows that structured upgrading initiatives — combining training, certification support, and preferential procurement — enable local small and medium enterprises to meet the standards of multinational lead firms. Such programs improve absorptive capacity and create durable production linkages, amplifying the benefits of foreign investment and anchoring industrial upgrading within domestic networks.

Finally, industrial policies rarely succeed in isolation. Their impact depends on coordinated investment in infrastructure, skills, research, and innovation ecosystems. Direct support for firms without logistics upgrades, or training without research and development demand, delivers shallow results. Coherence across different interventions as well as with other policy areas — competition or trade policies for example — is essential.

When it comes to how industrial policy interacts with competition, support must not entrench incumbents or dampen market dynamism. Competition policy provides the discipline that keeps industrial strategies accountable.

Industrial and competition policies should be seen as complements, not substitutes. Industrial policy can spur investment and structural change, but without safeguards it risks shielding incumbents from competitive pressure. Competition policy ensures that resources continue to flow towards more productive firms.

Balancing selectivity and openness is key. Support for national champions may accelerate frontier innovation, but it can reduce contestability and raise the risk of capture. By contrast, policies that lower barriers to entry — upgrading programs for small and medium enterprises, open procurement, and supplier development — advance both industrial and competition policy objectives.

To make these complementarities work in practice, safeguards are critical. These could be achieved via conditionality, tying support to innovation, employment, or sustainability outcomes. Sunset clauses can also prevent indefinite subsidies while predictive competition assessments and the active involvement of competition authorities can detect and mitigate distortions.