Think Piece

Global Value Chains and Industrial Policies

By Patrick Low, Julia Tijaja, 
December 2013
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The nature and configuration of global value chains (GVCs) permit a degree of geographically substitutable value creation along supply chains. This is where industrial policy comes in. Governments may seek higher shares of value added on existing chains through trying to shift firms’ activity in GVCs, or through participating in new production sharing activities. Governments and firms do not necessarily share the same objectives. Governments seek to maximise value capture at the national level to promote objectives such as better living standards, higher productivity, the deployment of new technologies, increased employment opportunities, and more diversified and resilient economies. The key interest of firms is to maximise profits.

Different motivations and objectives may reasonably be expected to result in varying perceptions of the most desirable outcomes. In a world of constrained optimisation, the challenge is to seek mutually accommodating outcomes between markets and the state. In the final analysis, however, it is the responsibility of governments to do whatever is required to maximise social welfare. The conception and design of industrial policy is fundamental to the successful pursuit of this objective. The emergence of the more complex world of GVCs calls for more effective strategic collaboration between governments and the private sector, and accentuates the importance of government capabilities for policy effectiveness.

In the long and varied debate on industrial policy over the last six decades or so, different approaches have emerged. They can be broadly put in five main categories—import substituting industrialisation; export-oriented industrialisation; resource-based industrialisation; export processing zones; and industrialisation though innovation. The close involvement of governments in many variants of industrial policy can be a source of considerable risk. Good governance and integrity must be well developed. Technical, analytical, and operational capabilities must be strong. Solid strategic relationships and communication channels between governments, the private sector, and other relevant non-state actors need to be in place. The greater the extent to which a government convincingly pursues what are commonly described as horizontal policies, the greater the likelihood that conditions will exist for the successful application of industrial policy.

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