Industrial policy is the set of government measures intended to influence the structure, capabilities, productivity, development or resilience of productive industries and economic activities. It can encompass policies directed at particular sectors, technologies, firms, capabilities, regions or economy wide conditions affecting industrial development. The term does not describe one single instrument.
Industrial policy can include research and development support, innovation programmes, public procurement, infrastructure, skills development, financing mechanisms, investment incentives, cluster policies, public private partnerships, export support, sector strategies and other interventions. The OECD has described industrial policy broadly as covering a multitude of policy instruments and approaches and has examined areas including support for research and development, risk capital, innovative public procurement, sector approaches, clusters, business networks and national industrial strategies.
Industrial policy differs from general economic policy because it focuses more specifically on productive capabilities and the organisation or development of economic activity, although the boundaries are not fixed. A government building transport infrastructure can be pursuing general economic development, industrial development or regional development depending on the stated objective and design. A research grant may be science policy, innovation policy or industrial policy. A semiconductor strategy may combine industrial policy with technology, trade, energy, skills and national security measures. This overlap explains why industrial policy is difficult to define as a narrow category. Its distinguishing feature is generally the deliberate use of public policy to shape productive capacity, industrial capabilities, technological development or sectoral outcomes rather than merely responding to aggregate economic conditions.
Industrial policy can be horizontal or selective. Horizontal measures apply broadly across firms or sectors, such as general improvements to infrastructure, skills, research capacity, competition conditions or access to finance. Selective measures target particular industries, technologies, regions or activities. Sector specific strategies may be justified by policymakers on grounds such as technological spillovers, coordination failures, learning effects, strategic capabilities, externalities or long development times.
However, targeted policies also create risks of selecting activities that do not perform as expected, directing resources toward politically influential interests or sustaining inefficient activities. This distinction is important because the effectiveness of industrial policy cannot be inferred from the fact that a government supports an industry. Evaluation must examine the mechanism, additionality, implementation and counterfactual outcomes associated with the intervention.
Research and development policy is a major area of industrial policy because innovation can create benefits beyond the organisation undertaking the research. Knowledge can spill over to other firms, workers and industries, while private investors may face uncertainty about whether they can capture the full benefits of long term research. Governments can therefore use grants, tax incentives, research institutions, procurement and partnerships to influence innovation.
Public procurement can also serve as an industrial policy instrument when governments create demand for innovative products or technologies. The OECD's evaluation work specifically examines support for research and development, risk capital and public procurement for innovation, demonstrating that industrial policy can operate through several distinct mechanisms rather than simply through subsidies to established firms.
Industrial policy can also focus on clusters, networks and regional capabilities. Clusters are geographic or organisational concentrations of interconnected firms, suppliers, research institutions and supporting organisations. Governments may attempt to strengthen such ecosystems through infrastructure, skills, research partnerships, investment support or coordination mechanisms. Regional industrial policies can similarly target areas experiencing industrial decline or seeking to develop new productive specialisations.
Evaluation is difficult because regions and industries change for many reasons at once, and firms may select locations or participate in programmes because they were already growing. The OECD has highlighted methodological challenges in evaluating industrial and regional development policies, including the importance of clear objectives, identifiable policy levers and credible counterfactual analysis.
Industrial policy can pursue objectives beyond immediate production or employment. Governments may seek to develop technological capabilities, increase productivity, strengthen supply chain resilience, diversify economic activity, support decarbonisation, encourage innovation or develop strategic industries. Climate policy can overlap with industrial policy when governments seek to build domestic capabilities associated with low carbon technologies, while trade policy can influence the international competitiveness of supported industries. Such objectives can involve long time horizons, substantial uncertainty and coordination between public and private actors. The WTO has documented how industrial policies and related government interventions can affect international trade and create interactions with trade policy. Industrial policy should therefore be evaluated within the broader domestic and international policy environment rather than assessed as an isolated programme.
Industrial policy has historically been associated with different economic models and periods of government intervention. Some approaches emphasised state ownership or direct planning, while others relied on private markets supplemented by targeted incentives, infrastructure, research support or strategic coordination. Contemporary industrial policy discussions often encompass policies designed to strengthen innovation, supply chains, productive capabilities and emerging technologies without necessarily replacing market allocation throughout the economy. The terminology has consequently broadened.
What counts as industrial policy can depend on whether the definition focuses on sector targeting, productive capabilities, intervention instruments or stated objectives. This historical and definitional variation means that comparisons between countries require careful attention to what measures are actually included rather than assuming that every government uses the term in the same way.
The evaluation of industrial policy presents distinctive methodological problems because supported firms, sectors or regions may differ systematically from unsupported ones. A government may choose firms with high growth potential, meaning that subsequent growth cannot automatically be attributed to the intervention. Conversely, support may be deliberately directed toward activities that would otherwise face unusually high risks or long investment horizons. Evaluators therefore need to consider additionality, displacement, crowding out, spillovers, productivity, innovation, survival, investment and longer term structural effects. The OECD has specifically noted that systematic evidence of industrial policy efficacy is relatively scarce in several areas and that methodological challenges arise when evaluating complex packages of measures. This makes transparent objectives, credible evaluation designs and attention to counterfactual outcomes particularly important.
