The Rise of Industrial Policies in a Changing Global Landscape
As tariffs dominate current headlines, a significant rise in industrial policies is also reshaping governmental approaches to domestic economies. For many years, states utilized subsidies and various incentives to bolster critical industries and employment. However, the establishment of the World Trade Organization and the increased acceptance of global trade norms initially diminished such interventions. The COVID-19 pandemic and escalating geopolitical tensions have shifted this trend, with approximately a 390 percent rise in global industrial-policy actions from 2017 to 2024, particularly targeting critical sectors like defense, semiconductors, and advanced manufacturing equipment.
Understanding the Economic Implications
Industrial policies significantly influence the operational landscape for businesses by affecting factors such as:
- Market Access: Restrictions on exports and imports.
- Labor Availability: Workforce development programs.
- Capital Investment Economics: Adjustment of capital costs due to subsidies.
In specific scenarios, such as battery technology, government incentives can drastically alter competitive dynamics—representing nearly 30 percent of global battery revenues in 2023.
Strategizing in a New Environment
To navigate this complex landscape, companies need a comprehensive understanding of available government incentives. Integrating industrial policy considerations into business strategies can foster investment returns, minimize innovation project risks, and unveil pathways for growth.
Essential Strategies for Business Leaders
The following approaches can help firms succeed in this shifting environment:
- Survey Industrial-Policy Measures: Evaluate relevant incentives in various geographies and sectors.
- Assess Incentive Durability: Validate the stability of business cases that depend on these incentives.
- Benchmark Against Competitors: Analyze how effectively the organization utilizes industrial-policy support compared to rivals.
A Historical Perspective on Industrial Policy
Governments pursue industrial policies to achieve broader economic and geopolitical aims. The primary forms of industrial policy include:
- Fiscal Incentives: Tax benefits and regulations that favor specific sectors.
- Financial Incentives: Government-provided funding such as grants, loans, or subsidies.
- Market Promotion: Actions to foster demand and favorable market conditions.
Well-known examples include the U.S. Apollo program, which mobilized thousands of entities for the space race, and South Korea’s interventions that catalyzed its industrial evolution in the late 20th century.
Recent Developments in Industrial Policy
In response to geopolitical dynamics, developed nations are reassessing their industrial policies. The rise of China has accelerated competition with Western economies, and disruptions caused by the pandemic have highlighted the importance of robust domestic capabilities, pushing governments towards encouraging onshoring. Furthermore, shifts in energy markets, particularly following geopolitical events like Russia’s invasion of Ukraine, have led to heightened focus on national energy security and defense investments.
It is essential for leaders to differentiate between general government support and targeted interventions that serve geopolitical interests. While agricultural support may stand independently of geopolitical factors, U.S. investments in the semiconductor industry are certainly influenced by national security considerations.
Exploring Government Incentive Dynamics
Our analysis reveals recent industrial-policy actions explicitly connected to geopolitical motives, accounting for approximately 12,000 interventions since 2017, largely characterized by financial incentives, which make up about 75 percent of the measures employed.
China has notably led these efforts, issuing 78 percent of financial incentives analyzed in 2019. The United States has seen a growing application of similar measures, specifically post-pandemic, increasing by an average of 33 percent each year between 2017 and 2020.
Advancing Opportunities in Key Sectors
Recent industrial policies heavily focus on certain industries and technologies. Our review indicates that thirteen product categories represent 96 percent of global incentive value, with defense and high-end equipment seeing the most considerable government attention. Rising sectors like batteries, hydrogen energy, and iron and steel are receiving significant investment and regulatory support:
- Batteries: With global shortages predicted, there is a rapid increase in government interventions targeting innovative battery technologies.
- Hydrogen Energy: As a potential sustainable fuel, investments in hydrogen projects are projected to rise sharply, creating a new trillion-dollar market by 2050.
- Iron and Steel: This sector has garnered significant attention due to national security and economic competitiveness concerns, with many interventions since 2017.
Navigating Risks and Opportunities
As industrial policies evolve, businesses should consider three critical actions:
- Exploring Diverse Incentives: Research incentives across various levels of government and regions.
- Evaluating Trade-offs: Assess the potential constraints associated with government funding and investment incentives.
- Benchmarking Competitively: Analyze the utilization of government support relative to industry peers to understand competitive advantages better.
In conclusion, the surge in government support for domestic industries creates substantial opportunities for businesses capable of navigating the evolving landscape. By understanding the implications of industrial policies, executives can enhance their strategic decision-making, driving growth while mitigating associated risks.