World Investment Report 2018
Industrial policies are becoming ubiquitous
UNCTAD’s global survey of industrial policies shows that, over the past 10 years alone, at least 101 economies – both developed and developing, and accounting for more than 90 per cent of global GDP – have adopted formal industrial development strategies. The last five years have seen an acceleration in the formulation of new strategies.
Modern industrial policies are increasingly diverse and complex, addressing new themes and including myriad objectives beyond conventional industrial development and structural transformation. They include GVC integration and upgrading, development of the knowledge economy, build-up of sectors linked to sustainable development goals, and competitive positioning for the new industrial revolution (NIR).
Investment policies (in particular FDI policies in developing countries) have always been a key instrument of industrial policies. Different industrial policy models come with a different investment policy mix. New themes in modern industrial policies need to be reflected in investment policies. The NIR, especially, requires a strategic review of investment policies for industrial development.
Modern industrial policy packages are increasingly complex
In its recent incarnation, industrial policy is best seen as a package of interactive strategies and measures aimed at (i) building enabling industrial systems (infrastructure, financial systems) and productive capacity (including assets, technology and skills), and (ii) supporting the development of internal and export markets. These objectives require initiatives at the firm, industry and cross-industry levels. Each of these components has investment policy elements.
UNCTAD’s survey shows that some 40 per cent of recently adopted industrial development strategies contain vertical policies for the build-up of specific industries (figure 10). Just over a third focus on horizontal competitiveness, enhancing policies designed to catch up to the productivity frontier. And a quarter focus on positioning for the NIR.
Build-up, catch-up and NIR-based strategies are all modern versions of industrial policy, appropriate for sequential stages of development. They are not discrete models; all build-up policies contain horizontal measures to enhance competitiveness, catch-up models promote innovation and the adoption of new technologies, and NIR-based models use build-up mechanisms for new industries.
About 90 per cent of industrial policies stipulate detailed investment policy tools, mainly fiscal incentives and special economic zones (SEZs), performance requirements, investment promotion and facilitation, and, increasingly, investment screening mechanisms (table 4). Investment policy packages across the three models use similar instruments, with different focus and intensity.
Industrial policy is a key driver of investment policy practice
More than 80 per cent of investment policy measures recorded since 2010 are directed at the industrial system (manufacturing, complementary services and industrial infrastructure), and about half of these clearly serve an industrial policy purpose. Most are cross-industry; about 10 per cent target specific manufacturing industries. In line with industrial policy models, the most frequent measures relate to incentives and performance requirements, SEZs, investment facilitation and investor targeting, and investment screening procedures.
Incentives remain the most commonly used tool for industrial policy (figure 11). Significant progress has been made in making incentives more effective instruments for industrial development. About two-thirds of incentives schemes applicable to manufacturing target multiple or specific industries, and even horizontal schemes tend to focus on defined activities, such as research and development (R&D), or on other industrial development contributions. Performance requirements (mostly conditions attached to incentives) are also widely used to maximize MNE contributions to industrial development, but much of their functionality could be achieved by better designed, cost-based incentive mechanisms.
SEZs continue to proliferate and diversify. In most countries, the transition from pure export processing zones to value added zones continues, and new types of zones are still emerging. Targeted strategies to attract specific industries and link multiple zones have supported industrial development and GVC integration in some countries that have adopted build-up and catch-up industrial policies, although enclave risks remain. High-tech zones or industrial parks are also becoming a key tool for NIR-driven industrial policies.
Modern industrial policies have boosted investment facilitation, which until recently played a secondary role in investment policy frameworks. Many developing countries, especially, have made investment facilitation one of the key horizontal measures in their industrial development strategies. Targeted investment promotion (beyond incentives and SEZs) also remains important: two-thirds of investment promotion agencies are guided by industrial policies in defining priority sectors for investment promotion, and three-quarters have specific promotional schemes to upgrade technology in industry.
Manufacturing sectors are rarely affected by outright restrictions on foreign ownership. Restrictions remain common in some infrastructure and services industries that are relevant for industrial development, however. Most measures adopted over the last decade have removed or relaxed foreign ownership restrictions, but entry rules – or rather, procedures – have still been tightened in some cases through new screening processes or requirements, including in developed economies, following NIR-driven industrial policy models.
IIAs can both support and constrain industrial policy. They can foster investment by protecting it and liberalizing rules, but they can also limit policy space by precluding the use of certain restrictions or performance requirements. A number of flexibility mechanisms exist to mitigate the constraining effect of IIAs.
Investment policies need to evolve with industrial policies
As industrial policy is proliferating and becomes the mainstream of development strategy, a key challenge is emerging for policymakers today: new industrial policies need to make more effective use of investment policy instruments, and investment policies need to modernize in line with new industrial development strategies.
Modern industrial policies, be they of the build-up, catch-up or NIR-driven variety, tend to follow a number of design criteria. These include openness, sustainability, NIR readiness and inclusiveness. Investment policy choices should be guided by these design criteria and by the need for policy coherence, flexibility and effectiveness (figure 12).
Policy practice shows how build-up, catch-up and NIR-based industrial policies emphasize different investment policy tools and focus on different sectors, economic activities and mechanisms to maximize the contribution of investment to the development of industrial capabilities. The investment policy toolkit evolves with industrial policy models and stages of development.
Countries need to ensure that their investment policy instruments are up-to-date, including by reorienting investment incentives, modernizing SEZs, retooling investment promotion and facilitation, and crafting smart foreign investment screening and monitoring mechanisms. The new industrial revolution, in particular, requires a strategic review of investment policies for industrial development.
For modern industrial policies to contribute to a sustainable development strategy, policymakers need to enhance their coherence with national and international investment policies and other policy areas, including social and environmental policies. They need to take a “whole of government” approach, to create synergy. They also need to strike a balance between the roles of the market and the State and to avoid overregulation. Finally, they need to adopt a collaborative approach that is open to international productive-capacity cooperation, and avoid beggar-thy-neighbour outcomes.