Management Papers

Document Type

Journal Article

Date of this Version

2010

Publication Source

Handbook of Development Economics

Volume

5

Start Page

4039

Last Page

4214

DOI

10.1016/B978-0-444-52944-2.00001-X

Abstract

In this chapter we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as “industrial policy.” We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review we find no support for “hard” interventions that distort prices to deal with Marshallian externalities, learning by exporting, and knowledge spillovers from FDI. Nevertheless, we still envision an important role for what we refer to as “soft” industrial policy. The goal is to develop a process whereby government, industry and cluster-level private organizations can collaborate on interventions to increase productivity. We suggest programs and grants to help particular clusters by improving the formation of skilled workers, technology adoption, regulation and infrastructure.

Copyright/Permission Statement

© 2010. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

trade, foreign investment, industrial policy, agglomeration

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Date Posted: 27 November 2017