Think Piece

Industrial Policies for Upper-Middle-Income Countries

By Keun Lee
March 2015
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The middle-income trap is a situation in which middle-income countries face a slowdown of growth. It tends to occur when middle-income countries get caught between low-wage manufacturers and high-wage innovators—their wage rates are too high to compete with low-wage exporters and their level of technological capability is too low to enable them to compete with advanced countries. So, this paper suggests various ways to cultivate the innovation capabilities of middle-income countries so that they advance out of the trap. The first thing is establishing in-house research and development laboratories, and firms may then explore diverse channels of learning and access to foreign knowledge. These include public-private joint R&D; co-development contracts with foreign R&D specialist firms; promoting spin-offs from academia; promoting domestic firms by learning from FDI firms; and initiating international mergers and acquisitions. Many of these schemes, such as R&D subsidies, have not been restricted (or classified as green light subsidies) under World Trade Organization (WTO) rules. So, developing countries are well advised not to use the WTO restriction on industrial policies as an excuse for not trying anything because the space for such policies still exists.

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