In the realm of emerging technologies such as artificial intelligence and blockchain, an important question arises: should industrial policy have a role? If the answer leans towards affirmation, what distinct characteristics should industrial policies in high-tech sectors possess when compared to traditional industries? Furthermore, how can governments formulate effective policies to drive the growth of these new industries?

The Classifications and Origins of Industrial Policy

According to Dani Rodrik, a prominent expert on industrial policy, it refers to government interventions in economic structures with the aim of achieving specific public objectivesTraditionally, industrial policy has been categorized into three main typesThe first is structural policy, which encompasses government choices aimed at optimizing industrial structure within a defined timeframe

For instance, policies that promote or support a particular industry, coupled with those that guide the optimization or exit of certain sectors, fall within this categoryThe second type is organizational policy, which primarily consists of government measures to adjust resources within specific industries, including regulations and antitrust policies targeting monopolistic practicesThe third form is locational policy, focusing on optimizing spatial arrangements of industries, such as through industrial zone planning and regional development programs.

Many consider industrial policy's origins to trace back to Japan's post-World War II economic revivalHowever, some scholars argue it dates back to the founding of the United StatesIn 1791, then-Treasury Secretary Alexander Hamilton submitted the influential "Report on the Subject of Manufactures" to Congress, advocating for three principles to bolster American manufacturing: first, incentivizing American industry through rewards or subsidies; second, using tariffs to protect domestic enterprises; and third, encouraging the import of talent and technology by rewarding those who bring valuable innovations from abroad

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This report significantly shaped subsequent American government policies, considerably aiding the development of manufacturing in the northern states.

In 1825, a German scholar fled to America, profoundly struck by its burgeoning manufacturing sectorEager to uncover the roots of this success, he revisited Hamilton’s Report from over three decades prior and distilled its ideas into a coherent theoryThis scholar was Friedrich List, whose theories later became foundational for industrial policy, introducing the concept of “infant industry protection.”

According to List's theory, emerging industries in a country often struggle to compete with established, mature industries internationallyIf a laissez-faire approach is taken, these nascent sectors may stagnate under external pressures

Consequently, government intervention through appropriate policies—such as tariff protections, financial assistance, etc.—is essential to enhance their competitive edgeAs industries mature, they can develop their own comparative advantages and eventually contribute to the national economy.

After List reintroduced these concepts to Germany, his perspectives quickly became integral to the German historical school of economics, profoundly influencing its economic policiesDuring Germany's industrialization, the government extensively employed tariffs, fiscal subsidies, and policy support for essential heavy industries, which laid important groundwork for Germany’s emergence as a leading industrial power.

A Classic Example of Industrial Policy: Promoting Structural Transitions

Throughout the twentieth century, numerous nations have employed industrial policies as part of their economic development trajectories

In comparison to early industrializers like the U.Sand Germany, these later entrants displayed greater ambition, no longer satisfied with merely protecting limited nascent industriesInstead, they aimed to dynamically utilize industrial policies to facilitate national transformation and optimize their industrial structuresJapan’s post-war industrial policy exemplifies this ethos.

After World War II, Japan's economy was in ruins, its industrial foundation nearly obliteratedTo restore economic vitality swiftly, the Japanese government identified steel and coal as key industries to spearhead recoveryBy concentrating resources on these sectors, they catalyzed broader industrial growthDuring this phase, Japan's policies manifested predominantly through raw material allocations and price controls, embodying a robust planned economy ethos.

By the late 1950s, Japan’s economy started to recover gradually

At this juncture, industrial policy redirected its focus from addressing “bottleneck” industries to bolstering “pillar” and “export-oriented” sectors, emphasizing support for industries like synthetic fibers, petrochemicals, machinery, and electronicsPolicy tools also began a shift from direct intervention to indirect measures such as special tax incentives, fiscal investment loans, maritime interest subsidies, and foreign exchange quotas.

The 1960s saw Japan targeting heavy and chemical industries and enhancing industrial competitiveness as core objectives of its policiesIn alignment with the emerging trend towards trade and capital liberalization, this era marked progressive evolution and refinement of Japan's industrial policies to align more closely with modern market logicWhile support for key industries remained a focus, there was an increasing emphasis on harmonizing relationships among large, medium, and small enterprises, striving to maintain market competitiveness.

Entering the 1970s, Japan faced challenges from environmental issues triggered by rapid heavy and chemical industrial growth

Consequently, there was a shift towards transitioning the industrial structure from heavy industries to a more “knowledge-intensive” modelThis governmental pivot involved formulating industrial structural adjustment policies to usher inefficient industries out of capacity excess while prioritizing support for high-tech sectors like semiconductors and computingJapan made notable strides in high-tech fields, particularly with breakthroughs in dynamic random-access memory (DRAM) production, which propelled Japan to the forefront of global semiconductor technology.

However, Japan's industry policy soon confronted setbacksBy the 1980s, as computing became crucial for global technological competition, Japan aimed to lead the development of “fifth-generation computers.” Despite substantial investments coordinated by the Ministry of International Trade and Industry, failures in strategy led to protracted delays and ultimately, the demise of the project amidst Japan's economic bubble burst.

A retrospective examination of Japan's post-war industrial policy indicates that its ambitions extended beyond mere protection of a few nascent industries

Instead, Japan sought to leverage policy to proactively drive comprehensive adjustments in its national economic structurePolicymakers frequently referenced mainstream economic theories, including structural transformation and technological absorptionMoreover, the shift from direct to indirect intervention aimed to amplify market roles while ensuring effective government guidanceWhile Japan's policies yielded remarkable results by the early 1980s, helping the nation escape post-war poverty and establish strongholds in steel, aluminum, and electronics, they faltered in the realm of emerging technologies like computingThis sparked skepticism regarding the applicability of industrial policies in high-tech domains.

Transformation of Industrial Policy: From "Vertical" to "Horizontal"

In Japan's era of rapid economic ascent, industrial policy was lauded as a hallmark of its success

Yet, as Japan grappled with economic stagnation, assessments of its policies shiftedAdvocates of free-market principles argued that most industrial policies fell short of their intended goals, distorting Japan's industrial landscape and contributing significantly to the prolonged economic malaiseThe failures of Japan’s “fifth-generation computer” initiative amplified doubts regarding the effectiveness of industrial policies in high-tech sectorsConsequently, interest in such policies diminished.

Only in recent years has the discourse surrounding industrial policy experienced a revivalScholars reviewing Japan's experiences noted that the failures of the “fifth-generation computer” project stemmed not from the inadequacy of industrial policy itself, but from misjudgments in choosing specific policy instruments.

Specifically, Japan’s approach traditionally favored “winner-picking” policies, often termed “vertical industrial policies” within academic circles

These policies carry evident advantages; when government objectives align clearly with the right industries or firms, a concentrated resource strategy can expedite industry developmentJapan's rapid growth over approximately three decades underscores this assertionHowever, the pitfalls of vertical industrial policies are equally pronounced, as flaws emerge if government objectives misalign or selected industries and firms falter soon afterThe selection process can breed corruption risks, and chosen winners may conceal setbacks to protect vested interests, impeding competition from genuinely capable entities.

For example, while multiple technological routes existed for the new generation of computers, Japan's fixation on developing logic programming machines based on Prolog incurred prevailing costsEven when concerns over the chosen technology's viability arose, vested interests steered the project further down its narrow path, leading to enormous losses.

These inherent shortcomings of vertical policies have prompted scholars to advocate for caution in their application, particularly within burgeoning technological sectors rife with uncertainty

If the government unilaterally supports a singular technological route and its respective firms, the probability of failure escalates significantly.

Against this backdrop, a growing contingent of scholars emphasizes the importance of “horizontal industrial policies” over vertical approachesThese horizontal policies are characterized by universal measures to ensure collective industry development, such as improving infrastructure, strengthening talent cultivation, enhancing R&D tax deductions, bolstering intellectual property protections, expanding capital markets, and facilitating financial growthUnlike vertical policies that select winners, horizontal strategies afford all market participants equitable access to policy benefits, leaving end results to market competitionNumerous empirical studies affirm the effectiveness of horizontal policies; for instance, research by the esteemed economist Philippe Aghion in the American Economic Review illustrated that allocating resources to competitive industries significantly boosts productivity.

Reflecting these insights, many nations are prioritizing horizontal policies in their industrial planning and implementation

For example, the European Union’s 2022 Industrial Policy Roadmap allocates over 70% to horizontal measures, with vertical policies comprising less than 30%.

Does High-Tech Industry Require Industrial Policy?

Having explored the concept and trajectory of industrial policy, let’s return to our initial inquiry: is industrial policy still relevant for high-tech industries? In my perspective, the answer is a resounding yesIn fact, when compared to traditional sectors, industrial policy not only remains effective for high-tech industries but holds even greater potentialThe reasons for this are multifaceted:

Firstly, high-tech industries typically demand substantial upfront investment in R&DCompanies often allocate large sums without immediate returns, making it difficult for most firms to navigate extended R&D periods independently

Take Boston Dynamics as an example; the company engaged in research on robotic leg balance for over a decade, taking more than thirty years from inception to launching its first commercial robotWithout sustained support and orders from the U.Smilitary during this lengthy process, the company might have faltered.

Secondly, high-tech industries usually involve lengthy and complex supply chains that require collaborative efforts from numerous stakeholdersWithout requisite coordination, progress can stall considerablyFor example, in the semiconductor industry, the value chain is segmented into design, manufacturing, and assembly, with multiple intricate processes within each categoryGiven the current international division of labor, many phases are dispersed across various countries and companies, potentially leading to misalignment regarding capacity, standards, and supply chain security

In 2022, the formation of the "Chip 4 Alliance" aimed to comprehensively synchronize activities across the semiconductor value chainWhile this alliance primarily seeks to solidify existing hegemony and restrain China's semiconductor rise, it has importantly unified the efforts of member companies, fostering progress within the semiconductor industry.

Thirdly, high-tech industries often lack sufficient market scale in their early stagesWithout intervention, their development can be hindered by demand constraintsWhen governments can moderately stimulate consumer demand, it can significantly propel industrial growthChina’s encouragement of new energy vehicles exemplifies this pointTraditional fuel vehicles dominated the market for years, but when new energy vehicles first emerged, demand was limitedTo tackle this issue, the government launched a series of incentive programs, including purchase subsidies and license plate benefits

These moves considerably reduced consumers' entry costs and expedited market acceptance of new energy vehiclesStatistics indicate that in the first half of 2024, approximately 4.397 million new energy vehicles were registered in China, accounting for 41.42% of all new motor vehicle registrationsClearly, policies that stimulate demand have played a critical role in the development of China’s new energy vehicle sector.

Fourthly, the growth of high-tech industries hinges on the availability of specialized talentIf this talent pool is inadequate, industry advancement will be hinderedTypically, due to cost considerations, companies are reluctant to shoulder the expenses of large-scale talent development aloneIn this context, it falls upon governments to assume responsibility for nurturing this talentReal-world examples abound; for instance, the U.S

aimed to attract TSMC to establish fabrication plants in Arizona, offering large subsidiesHowever, progress remained slow, primarily due to a lack of skilled workers essential for wafer manufacturing, particularly engineers with high competenciesAdditionally, DEI (Diversity, Equity, and Inclusion) policies posed further challenges in hiring talent from other regionsEven with significant financial backing, TSMC expressed hesitation about establishing a facility in the U.SThis instance illustrates that ensuring talent training and provision through policy mechanisms is crucial for bolstering high-tech industry growth.

Fifthly, high-tech industry development often necessitates specialized infrastructureIf infrastructure is inadequate, it can severely hamper industrial growthGenerally, building such infrastructure exceeds the capacity of individual enterprises, underscoring the need for policy support

Take the new energy vehicle sector again: while its future trajectory seems increasingly clear, many regions still grapple with the challenge of insufficient charging infrastructureConsumers hesitate to purchase out of fear regarding charging availability, while providers are reticent to invest due to uncertain market demand, resulting in the proverbial “chicken and egg” dilemmaIn such scenarios, government intervention is indispensable to promote infrastructure developmentBy either directly constructing charging stations or providing subsidies, the government can alleviate consumer anxieties and facilitate smoother industrial maturation.

Sixthly, the development of high-tech industries can bring about significant negative externalitiesIf these adverse externalities are not adequately addressed, they may affect society’s acceptance of the technologies involved

For instance, while the implementation of AI can boost productivity and reduce labor costs, it may simultaneously cause widespread unemploymentIgnoring this issue could lead to societal grievances or conflictsHence, countries that encourage AI adoption often emphasize job security and re-employment training initiativesThrough these policies, governments can effectively mitigate the employment shocks induced by AI technologies, avoiding unnecessary social upheaval.

In summary, industrial policy holds vital relevance for high-tech industries, and its role is sometimes indispensable across various facets of development.

Designing Industrial Policies for High-Tech Industries

With a clear understanding of the necessity of industrial policies for high-tech sectors, the next question arises: how should these policies be designed? While there’s no universal consensus on this issue, certain best practices have emerged as valuable references.

Firstly, when selecting the objectives of industrial policy, the focus should center around addressing market failures.

It’s crucial to recognize that formulating industrial policies is not about creating a planned economy or substituting market mechanisms with administrative means; rather, it’s about utilizing governmental authority to correct market failures, thus empowering markets to function more effectively

Throughout the development of high-tech sectors, market failures manifest consistently, evident in various dimensions: first, market incentives for entities providing positive externalities, such as infrastructure, knowledge innovation, and technology diffusion, are often insufficient; second, there is insufficient market intervention for entities contributing negative externalities, such as unemployment and privacy violations; and lastly, coordination among different segments of the industrial chain frequently faltersPolicymakers need to accurately identify market failures impeding the growth of industries, crafting targeted policy responses based on industry characteristics.

Secondly, on the implementation of industrial policies, a synthesis of vertical and horizontal approaches, alongside supply-side and demand-side considerations, should be pursued.

Initiating with vertical-horizontal integration, high-tech industries often encompass extended supply chains

For industries to thrive healthily, all segments must progress in coordinationCertain sectors may already possess mature manufacturing technologies and widely known production processes, while others remain undefined amidst competition among divergent technological routesFor established mature segments, it is prudent to employ vertical industrial policies, selectively supporting qualified firms; conversely, for uncertain technological routes, horizontal policies should prevail to facilitate market competition in identifying optimal solutions.

Next, the focus should shift to synchronizing supply and demandIn practice, supply-demand imbalances frequently challenge the growth of high-tech sectorsSometimes, demand surges without adequate supply; other times, rapid technological progress fails to identify corresponding market needsPolicies should prioritize creating conditions for effective supply-demand matching

For example, within the AI sector, misalignments between large model providers and the requirements of tangible businesses are commonplace, whereby government intermediaries can help bridge the gap.

Finally, a blend of concentration and competition should be encouragedIn the initial development stage of an industry, resource concentrations may be crucial to breakthrough key technical hurdles; once these bottlenecks are resolved, fostering a competitive landscape among diverse enterprises is beneficialThe model of the U.SDefense Advanced Research Projects Agency (DARPA) offers a compelling reference: concentrating efforts during technological advancements allows for breakthroughs, which can then be commercialized through project bidding, spurring competition among enterprises to catalyze industry growth.

Thirdly, it is essential to periodically evaluate and recalibrate industrial policies