## sdnea2025002

## Source details

**Canonical URL:** [sdnea2025002](https://www.imf.org/-/media/files/publications/sdn/2025/english/sdnea2025002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/sdn/2025/english/sdnea2025002.pdf.md)
- [Structured JSON version](/-/media/files/publications/sdn/2025/english/sdnea2025002.pdf.json)

---

### Overview
- The use of industrial policies (IPs)—interventions targeting sectors or firms directed at changing the structure of economic activity within an economy—has risen in recent years, especially after 2017.
- The Staff Discussion Note (SDN) empirically studies the performance of sectors targeted by IPs relative to non-targeted sectors in the 2009-2021 period using databases covering advanced economies (AEs) and emerging market and developing economies (EMDEs).
- The SDN provides a positive, data-driven assessment of IPs’ impacts on targeted sectors and does not attempt a full welfare assessment.

### Recent trends, data coverage, and instruments
- Data coverage and scope:
  - Database coverage: 109 countries between 2009–22.
  - Analysis spans 2009 to the last year available for outcomes (mostly 2021).
- Recent trends:
  - Total count of IPs stayed below 200 policies in the 10 years following the global financial crisis.
  - The count of IPs tripled between 2017 and 2018.
  - By 2022 there were almost 1400 IPs.
  - IPs accounted on average for less than 25 percent of the total count of policies in GTA before 2017; this number rose to more than 35 percent in the 2017–22 period.
  - AEs’ IPs: around 100 in 2017 to close to 1000 in 2022.
  - EMDEs added 350 interventions between 2017 and 2022.
- Instrument classification (seven broad categories identified in the source):
  - export barriers; import barriers; domestic subsidies; export incentives; restrictions on FDI; procurement policies; local content requirements.
- Instrument composition 2018–22:
  - Domestic subsidies were the most common IP, followed by export incentives.
  - Subsidies account for almost 70 percent of IPs in EMDEs.
  - Subsidies account for close to 60 percent of IPs in AEs.
  - Export incentives account for 30 percent of IPs in AEs.
  - Export incentives account for 15 percent of IPs in EMDEs.

### Key empirical findings on targeted-sector performance
- Average effects:
  - On average, IPs are associated with moderate and uneven improvements in the performance of targeted sectors.
  - The introduction of a new IP is associated, on average, with a 5.6 percent improvement in the competitiveness of the targeted product (measured by revealed comparative advantage, RCA) three years after introduction.
- Heterogeneity of impacts:
  - IPs targeting highly distorted sectors (those with high markups and external financial dependence) are linked to improvements in value added that are four times as large in the medium term as those targeting less distorted sectors.
  - An additional protectionist IP is associated with a 4 percent increase in value added of highly distorted sectors in the medium term but no increase in value added of sectors with low distortions.
  - IPs targeting upstream sectors are associated with broader economy-wide benefits through positive supply-chain spillovers; downstream-targeted IPs can be negatively associated with firm performance.
  - Targeting products closer to the frontier (high initial RCA) yields faster and larger gains; IPs targeting products in which the country is not competitive do not show definite gains over the horizon considered.
- Instrument heterogeneity:
  - Domestic subsidies: linked to short-term increases in competitiveness (about 5 percent) and sustained increases in the capital stock at the firm level; in the medium term, domestic subsidies are associated with a 1 percent increase in value added.
  - Export incentives: linked to more sustained competitiveness and productivity improvements after an adjustment period; an additional export incentive policy is associated with 0.5 percent lower productivity for the average firm in the first two years, and with a 0.7 percent increase in productivity and value added of young firms in the medium term.
  - Export incentives: initial 1 percent decline in competitiveness followed by medium-term improvements (instrument-specific RCA pattern).

### Industry- and firm-level outcomes and mechanisms
- Firm- and sector-level dynamics:
  - Method: local projections tracking value added, investment, payroll, TFP, and patents; main explanatory variable is the count of IPs implemented in a given sector, country and year.
  - For domestic subsidies:
    - One additional subsidy in a sector is associated with a 2 percent increase in the capital stock of firms with the largest cash flow to assets ratio three years after announcement.
    - The same policy is associated with a 3.6 percent increase in the capital stock of younger firms three years after announcement.
    - An additional protectionist subsidy is associated with a 2 percent increase in the number of received foreign patent applications in the first year which does not last beyond the second year.
  - For export incentives:
    - An additional export incentive measure is associated with a 0.7 percent increase in productivity and value added of young firms in the medium term.
    - Export incentives are associated with a temporary 2 percent increase in received foreign patent applications that materializes in the second year and does not persist thereafter.
- Allocative efficiency and heterogeneity:
  - Allocative efficiency effects are mixed: subsidies are not robustly associated with changes in within-sector allocative efficiency; new export incentives and allocative efficiency are positively associated in the short term.
  - Younger and more financially constrained firms benefit more from IPs; IPs create winners and losers within targeted sectors with potential within-sector spillovers.

### Innovation, patents, and technology transfers
- Aggregate IPs → patents:
  - An additional IP in a sector is associated with a 1.4 percent increase in received foreign patent applications in the short run, followed by a medium-term decline.
  - Patents filed by local inventors do not generally increase with average IPs, except for climate-motivated IPs where local-inventor patenting rises gradually and persistently.
- Timing and persistence:
  - Subsidies: 2 percent increase in received foreign patent applications in the first year (not lasting beyond the second).
  - Export incentives: 2 percent temporary effect in the second year.
  - Interpretation: rapid and short-lived effects suggest acceleration of patenting for innovations already in the pipeline rather than sustained new innovation.

### Reductions in trade barriers and trade-liberalizing policies
- Trade-liberalizing impacts (medium term, from one additional liberalizing policy):
  - 1.6 percent higher productivity,
  - 1.2 percent higher value added,
  - 0.8 percent more payroll,
  - 0.4 percent more capital stock (the latter not statistically significant).
- Lifting an additional import barrier (i.e., reducing trade restrictions) increases the number of received patent applications by 5 percent on average after four years.
- Trade-liberalizing policies produce more uniform within-sector benefits, foster competition and scale economies, and support longer-term technological transfers.

### Green industrial policies (Box 2: Arguments and Impacts)
- Justifications:
  - Novelty of low carbon technologies (LCTs) and emission externalities provide additional rationale for IPs targeting green products.
- Empirical outcomes:
  - New IPs targeting green products increase RCA by about 20 percent after four years.
  - IPs motivated by climate change are associated with a gradual and persistent increase in innovation from local inventors, "exceeding 1 percent after five years."
  - IPs targeting green products yield larger medium-term increases in RCA and larger long-term benefits for innovation than IPs targeting non-green products.
- Caveat: the box’s analysis considers only the individual country perspective; globally, IPs by lagging countries could delay the green transition.

### Cross-country spillovers, trade tensions, and fiscal implications
- Cross-country effects:
  - Introduction of corporate subsidies in large countries was matched by subsidies in other large countries, indicating tit-for-tat dynamics.
  - IPs can distort relative competitiveness across countries and fuel tit-for-tat dynamics, increasing the risk of geoeconomic fragmentation.
  - Most export subsidies are prohibited under international trade rules; countries face risks of escalating trade tensions and retaliation.
- Fiscal costs:
  - IP expenditures in the 2019–21 period in a sample of OECD countries amounted to about 1.4 percent of GDP (Criscuolo and others 2023).
  - Subsidies can entail significant fiscal costs that amplify debt sustainability concerns; sunset clauses and time-bounds are recommended.

### Policy considerations and recommended design principles
- Six broad principles consistent with IMF guidance:
  1. Clearly target IPs: identify market failures, assess benefits, cross-sectoral spillovers, and alternative policies; prioritize upstream activities where appropriate.
  2. Ensure good governance and implementation capacity: strong bureaucratic capacity reduces capture and mis-targeting.
  3. Complement with structural reforms: well-functioning business environments, developed credit markets, and higher human capital increase likelihood of sustained gains; consider sequencing (structural improvement first).
  4. Choose instruments carefully: subsidies often yield only short-term benefits; export incentives can be effective but may conflict with WTO rules; consider “soft” interventions (reducing trade costs, export promotion, sector-specific infrastructure).
  5. Consider fiscal costs and sunset clauses: time-bound policies to limit fiscal and general-equilibrium costs.
  6. Pursue international cooperation where feasible: cooperative design and transparency can mitigate welfare losses and avoid wasteful duplication.
- Relative priority:
  - Structural, “horizontal” policies (for example, lowering corruption, improving governance, enhancing access to credit) have, on average, much larger effects than IPs and should be prioritized.
  - When IPs are used, they are more likely to succeed when embedded in an environment of good institutions, strong business conditions, efficient financial markets, and an educated workforce.

### Research scope, limitations, and methodological notes
- Scope limits:
  - SDN focuses on short- to medium-term relative impacts of implemented IPs on targeted sectors versus non-targeted sectors; it does not fully assess overall welfare gains or policy desirability.
  - The SDN does not quantify direct (fiscal) or indirect (general equilibrium) costs of IPs.
- Data and measurement caveats:
  - Primary data source: Juhász and others (2023), building on the Global Trade Alert (GTA) project.
  - The database records a subset of policy announcements—those affecting commercial interests—and starts in 2009, potentially underestimating earlier-active countries.
  - Many policies lack information on program size; most analysis relies on policy counts.
  - The SDN uses a local projection difference-in-differences approach for RCA and rich fixed effects and lags for firm-level exercises; robustness checks and endogeneity strategies are discussed in the Online Annex.

*Staff Discussion Notes — Industrial Policies: Handle with Care (sdnea2025002) — Executive Summary and selected excerpts. INTERNATIONAL MONETARY FUND*

### Executive Summary ......................................................................................................

### sdnea2025002 - Executive Summary

### Overview
- The use of industrial policies (IPs)—interventions targeting sectors or firms directed at changing the structure of economic activity within an economy—has risen in recent years, especially after 2017.
- This Staff Discussion Note (SDN) empirically studies the performance of sectors targeted by IPs relative to non-targeted sectors in the 2009-2021 period, using databases covering advanced economies (AEs) and emerging market and developing economies (EMDEs).
- The SDN provides a positive, data-driven assessment of IPs’ impacts on targeted sectors and does not attempt a full welfare assessment.

### Key empirical findings
- On average, IPs are associated with moderate and uneven improvements in the performance of targeted sectors.
- IPs are accompanied by a boost in the competitiveness of targeted products and are linked to moderate and at times short-lived improvements in sectoral outcomes.
- Heterogeneity of impacts:
  - IPs targeting highly distorted sectors (those with high markups and external financial dependence) are linked to improvements in value added that are four times as large in the medium term as those targeting less distorted sectors.
  - IPs targeting upstream sectors (inputs for other sectors) are associated with broader economy-wide benefits through positive supply-chain spillovers.
  - Targeting products closer to the frontier, as gauged by a high initial revealed comparative advantage (RCA), yields faster and larger gains; IPs targeting products in which the country is not competitive do not show definite gains over the horizon considered.
- Instrument heterogeneity:
  - Export incentives are linked to more sustained competitiveness and productivity improvements (albeit after an adjustment period).
  - Domestic subsidies are strongly associated with increases in capital accumulation.
  - These patterns are consistent with historically successful IP implementations in some East Asian countries.

### Structural reforms and comparison with IPs
- Structural, “horizontal” policies (for example, lowering corruption, improving governance, enhancing access to credit) have, on average, much larger effects than IPs.
- IPs are more effective in countries with:
  - Better institutions and governance (which limit capture by interest groups).
  - A stronger business environment (which eases factor reallocation to fast-growing firms).
  - More efficient financial markets (which allow IP support to be combined with private credit).
  - A more educated workforce.
- The SDN emphasizes that even when IPs may be desirable, complementary structural reforms are key to their success.

### Unintended consequences, spillovers, and fiscal costs
- IPs typically lead to reallocation of resources to targeted entities; this may not be welfare enhancing if it diverts resources from more productive sectors or firms.
- Evidence of heterogeneous firm-level impacts, including negative outcomes for some firms within targeted sectors.
- Negative cross-sector spillovers are documented when IPs target downstream sectors.
- Cross-country effects:
  - IPs can distort relative competitiveness across countries and fuel tit-for-tat dynamics, increasing the risk of geoeconomic fragmentation.
  - Most export subsidies are prohibited under international trade rules; countries face risks of escalating trade tensions.
- Fiscal implications:
  - IP expenditures in the 2019–21 period in a sample of OECD countries amounted to about 1.4 percent of GDP (Criscuolo and others 2023).
  - IPs can entail large fiscal costs that amplify debt sustainability concerns.

### Policy considerations and conclusions
- IPs should be handled with care:
  - The links between IPs and economic performance are modest and concentrated in specific contexts (for example, large pre-existing distortions, upstream sectors, products close to the frontier).
  - Costs and unintended domestic and international consequences can be large.
- Priority agenda:
  - Structural reforms should be prioritized given their larger average effects, lower likelihood of creating distortions, and lower fiscal costs.
  - When IPs are used, they are more likely to succeed when embedded in an environment of good institutions, strong business conditions, efficient financial markets, and an educated workforce.
  - Countries must carefully weigh the risk of trade retaliation, ensure consistency with international rules, and prioritize multilateral policy cooperation.

### Research scope and limitations
- The SDN focuses on short- to medium-term relative impacts of implemented IPs on targeted sectors versus non-targeted sectors; it does not fully assess overall welfare gains or policy desirability.
- A full welfare assessment would require:
  - Accounting for policy objectives, fiscal implications, impacts on non-targeted sectors, and cross-country spillovers.
  - More structural, fine-grained analysis tailored to specific policies and objectives (for example, green IPs aimed at emissions outcomes).

*Source: STAFF DISCUSSION NOTES — Industrial Policies: Handle with Care (sdnea2025002) — Executive Summary. INTERNATIONAL MONETARY FUND*

### 2022. Second, the analysis broadens the focus beyond the direct impact of IPs on targeted industries and

### sdnea2025002 - 2022. Second, the analysis broadens the focus beyond the direct impact of IPs on targeted industries and 

### Overview and objectives
- Presents stylized facts on the recent conduct of industrial policies (IPs) across countries and discusses merits and drawbacks of IPs.
- Assesses drivers of IPs and quantifies the link between IPs and economic performance.
- Provides a granular analysis of impacts of different policies, distinguishing between instruments.
- Compares economic benefits of IPs to those of structural reforms and assesses how structural reforms can amplify IP impacts.
- Studies sectoral and country characteristics that make IPs most effective.
- Discusses policy design considerations and salient factors not fully captured in the analysis.

### Data, definitions, and scope
- Primary data source: Juhász and others (2023), building on the Global Trade Alert (GTA) project.
- Definition used: IPs are policies aimed at “shaping the sectoral composition of economic activity.”
- Focus in this SDN: primarily on protective IPs; trade-liberalizing measures are analyzed in the context of structural reforms.
- Data coverage: aggregated at product/sector, country, and year level; covers 109 countries between 2009–22.
- Data limitations noted:
  - Only records a subset of policy announcements—those affecting commercial interests.
  - Starts in 2009, so stocks of IPs are relative to that year (may underestimate earlier-active countries).
  - Misses policies in key countries such as China because of implementation/recording approaches.
  - Machine learning classification may misclassify or miss some IPs.
  - Many policies lack information on program size; most analysis relies on policy counts.
  - Subnational policies and indirect incentives (for example, subsidized bank loans) may not be captured.

### Instruments and classification
- GTA/Juhász and others (2023) identify seven broad categories of policy instruments:
  - export barriers (for example, export bans and quotas)
  - import barriers (for example, tariffs and import licensing)
  - domestic subsidies (such as state loans, loan guarantees, and production subsidies)
  - export incentives (such as tax-based incentives and trade financing)
  - restrictions on foreign direct investment (FDI) (for example, ownership requirements and FDI screening decisions)
  - procurement policies
  - local content requirements
- This SDN primarily focuses on three instruments that account for the bulk of IPs in the database—protective domestic subsidies, protective export incentives, and policies that lift import barriers (liberalizing import policies).

### Recent trends: the rise of IPs
- Use of IPs has been on the rise since 2017 and accelerated since 2020.
- Aggregate and timing indicators:
  - Total count of IPs stayed below 200 policies in the 10 years following the global financial crisis.
  - 2017 marked a turning point—the count of IPs tripled between 2017 and 2018.
  - By 2022 there were almost 1400 IPs.
  - IPs accounted on average for less than 25 percent of the total count of policies in GTA before 2017; this number rose to more than 35 percent in the 2017–22 period.
- Country group patterns:
  - Both AEs and EMDEs have actively implemented IPs.
  - Number of IPs introduced by AEs rose substantially—from around 100 in 2017 to close to 1000 in 2022.
  - EMDEs added 350 interventions between 2017 and 2022.
  - Consequently, the share of recently implemented active IPs by AEs rose since 2017.
- Drivers of the recent rise: geopolitical tensions and conflicts; development of strategic sectors (for example, semiconductors and green-transition products); need to support new green technologies; supply-chain vulnerabilities highlighted by COVID-19.

### Composition of IPs by instrument and income group
- For the 2018–22 period by instrument:
  - Domestic subsidies were the most common IP, followed by export incentives.
- Differences across income groups:
  - Subsidies account for almost 70 percent of IPs in EMDEs.
  - Subsidies account for close to 60 percent of IPs in AEs.
  - Export incentives account for 30 percent of IPs in AEs.
  - Export incentives account for 15 percent of IPs in EMDEs.

### Economic rationales for IPs (six broad categories)
- Externalities and economies of scale: sector-level knowledge spillovers and agglomeration (example: software industry).
- Sector-specific fixed costs and financing constraints: R&D-intensive activities and limits to access to credit can justify intervention.
- Coordination failures: multiple equilibria where government action can help achieve a better equilibrium (example: EV adoption and charging station networks).
- Need for activity-specific inputs: public investment in infrastructure or skills for sector activities (example: refrigerated chambers for perishable exports).
- Diversification: IPs can help countries move up the value chain, reduce volatility, and boost investment and productivity.
- Trading-partner diversification and geopolitical shielding: IPs can reduce exposure to geopolitical risks (example: Korea’s heavy chemical industry strategy in the 1970s; CHIPS Act as response to perceived AI/technology race).

### Risks, implementation challenges, and fiscal concerns
- Implementation risks:
  - Successful IPs require detailed information about externalities and market failures; incomplete information can lead to selecting the “wrong” sectors or inappropriate policies.
  - Capture by firms and interest groups can divert government resources to activities that enhance private interest without societal benefits.
  - Success of IPs is linked to state capacity and bureaucratic quality.
- Fiscal costs and sustainability:
  - Most IPs involve financial support and thus carry fiscal cost.
  - Costs may be justified by higher medium-term growth if interventions succeed.
  - IPs can lead to wasteful spending, especially without clearly defined sunset clauses.
- Cross-sector spillovers:
  - IP-induced reallocation of factors of production toward targeted sectors may undermine aggregate benefits if done at the expense of more important sectors.
  - Targeting sectors where the country is initially less competitive and far from the global frontier may require sustained support and fiscal cost, and may hurt more competitive sectors.
- International retaliation:
  - Introduction of IPs can have adverse effects on other countries and prompt retaliatory policies.

### Key statistics and facts (verbatim)
- Database coverage: 109 countries between 2009–22.
- Total count of IPs: stayed below 200 policies in the 10 years following the global financial crisis.
- Tripling: count of IPs tripled between 2017 and 2018.
- By 2022: almost 1400 IPs.
- Share of IPs in GTA policies:
  - Before 2017: on average less than 25 percent of the total count of policies in GTA.
  - 2017–22 period: more than 35 percent.
- AEs’ IPs: around 100 in 2017 to close to 1000 in 2022.
- EMDEs’ additional interventions: 350 interventions between 2017 and 2022.
- Subsidies’ share:
  - EMDEs: almost 70 percent of IPs.
  - AEs: close to 60 percent of IPs.
- Export incentives’ share:
  - AEs: 30 percent of IPs.
  - EMDEs: 15 percent of IPs.
- Seven broad categories of instruments identified in the data.

*Source: STAFF DISCUSSION NOTES Industrial Policies: Handle with Care, INTERNATIONAL MONETARY FUND (excerpts provided).*

### introduction of corporate subsidies in large countries was matched by subsidies in other large countries.

### sdnea2025002 - introduction of corporate subsidies in large countries was matched by subsidies in other large countries.

### Overview and key message
- Introduction of corporate subsidies in large countries was matched by subsidies in other large countries, indicating tit-for-tat dynamics in industrial policies (IPs).
- IPs can take the form of subsidies and higher tariffs, and may contribute to economic fragmentation.
- The appropriate use of IPs requires careful assessment of benefits, costs, and risks and adherence to principles described in the IMF Policy Paper on industrial policies (IMF 2024b).

### Guidance on design and assessment of IPs
- Objectives and case for IPs should be clearly justified by well-identified market failures, including externalities.
- IPs should be well-targeted and temporary (with appropriate sunset clauses).
- Desirability of IPs should be assessed against alternative policies (for example, structural “horizontal” policies).
- Design must consider that different instruments affect different variables and entail different benefits, costs, and risks.
- Successful IPs may require complementary structural policies, including high-quality governance frameworks to limit rent-seeking and political capture.
- IPs should be compatible with macroeconomic stability (debt sustainability as well as balance of payments and domestic stability) and with legal commitments (for example, World Trade Organization (WTO) commitments).

### Data, scope, and methodological caveats
- Analysis combines multiple data sources: Juhász and others (2023) with CEPII BACI for trade; BvD Orbis for firm- and sector-level outcomes; LaBelle and others (2024) for patents.
- Analysis spans the period between 2009 and the last year available for the outcome variable (mostly 2021).
- Country coverage varies by exercise: trade and patent data include a large set of both AEs and EMDEs; firm-level analysis focuses mostly on AEs and EMs.
- The SDN does not quantify direct (fiscal) or indirect (general equilibrium) costs of IPs.
- Results should be interpreted with caution due to endogeneity concerns and potential omitted factors; the Online Annex discusses strategies to address endogeneity.

### Correlates and drivers of IPs (past 15 years)
- IPs tend to target sectors with higher distortions and greater interconnections to other sectors, especially in AEs.
  - Distortion-centrality (DC) index by Liu (2019) is used, combining sector distortions with interconnections using IO tables.
  - Markups within a sector (Ackerberg and others 2015) are used as the main measure of distortion; analysis is robust to using external financial dependence (Rajan and Zingales 1998).
- The number of protectionist IPs targeting a sector correlates positively with its DC, with this relationship strengthening in recent years.
- IPs are concentrated in products for which a country relies on imports from geopolitically distant countries, indicating geopolitical considerations.
- Many IPs in 2023 have “national security” and “GVC resilience” as stated objectives.
- The link between IPs and geopolitical distance is driven by advanced economies (AEs).

### Impact of IPs on trade competitiveness of targeted products
- The introduction of a new IP is associated, on average, with a 5.6 percent improvement in the competitiveness of the targeted product (measured by revealed comparative advantage, RCA) three years after introduction.
- The link between IPs and competitiveness is stronger for products with higher initial competitiveness:
  - Previously competitive products experience a large short-term boost, peaking after two years, then declining and becoming statistically insignificant in four years, though the estimated magnitude remains as high as 9 percent.
  - For initially non-competitive products, competitiveness initially declines and then increases gradually, albeit non-significantly over the horizon considered.
- Instrument-specific effects on RCA:
  - Domestic subsidies: linked to a short-term 5 percent increase in competitiveness, which fades over time.
  - Export incentives: yield an initial 1 percent decline in competitiveness, followed by medium-term improvements.
- Policy implication: choice of instruments presents a trade-off between short- and long-run benefits; export-oriented IPs may provide more sustained benefits.

### Industry- and firm-level performance associated with IPs
- Method: local projections tracking value added, investment, payroll, TFP, and patents; main explanatory variable is the count of IPs implemented in a given sector, country and year. Analysis includes rich fixed effects and lags; results robust to alternative IP intensity measures and endogeneity checks described in the Online Annex.
- Findings for domestic subsidies:
  - Associated with sustained increases in the capital stock at the firm level and in aggregate (aggregate increase not statistically significant).
  - Associated with short-term increases in value added, productivity (TFP), and payroll at the firm level which turn negative in the medium term.
  - In the aggregate, value added shows a more sustained, albeit moderate, improvement; productivity and payroll increases are temporary.
  - Short-lived firm-level effects may reflect the short duration of subsidies (about 3 years) or mistargeting, suggesting temporary subsidies do not lead to a self-sustaining virtuous cycle.
  - Evidence exists that IPs have negatively affected non-targeted firms in some contexts (for example, Europe).
- Broader caution: Full assessment of benefits requires gauging potential cross-sector and cross-country spillovers.

### Empirical approach notes and robustness
- Product-level RCA analysis uses a local projection difference-in-differences approach addressing heterogeneous treatment effects under staggered treatment; median number of IPs introduced by countries in a year is about 1.
- RCA proxied by the Balassa index; results robust to an RCA index that incorporates imports.
- Distortion-centrality and geopolitical distance measures and robustness references are cited within the SDN.

*STAFF DISCUSSION NOTES Industrial Policies: Handle with Care
INTERNATIONAL MONETARY FUND*

### 1. Domestic Subsidies 2. Export Incentives

### 1. Domestic Subsidies 2. Export Incentives

### Effects of Domestic Subsidies
- In the medium term, domestic subsidies are associated with a 1 percent increase in value added.
- Context: the average yearly growth rate of industry value added is about 5.4 percent.
- Heterogeneous response:
  - Capital accumulation responds more strongly to subsidies in financially constrained and young firms:
    - One additional subsidy in a sector is associated with a 2 percent increase in the capital stock of firms with the largest cash flow to assets ratio three years after announcement.
    - The same policy is associated with a 3.6 percent increase in the capital stock of younger firms three years after announcement.
- Allocative efficiency:
  - Subsidies are not robustly associated with changes in within-sector allocative efficiency (Figure 6, panel 3).
- Patenting and innovation:
  - An additional protectionist subsidy is associated with a 2 percent increase in the number of received foreign patent applications in the first year which does not last beyond the second year.
  - Patents filed by local inventors do not seem to increase with IPs.

### Effects of Export Incentives
- Short-term costs and medium-term gains:
  - An additional export incentive policy is associated with 0.5 percent lower productivity for the average firm in the first two years after implementation.
  - Export incentives are associated with mild improvements in TFP in the medium term after a period of adjustment.
  - For value added and capital, the medium-term recovery does not fully compensate the initial decline at the considered horizon.
- Firm-level heterogeneity:
  - The positive association between export incentives and firm performance occurs faster for younger firms.
  - In the medium term, one additional export incentive measure is associated with a 0.7 percent increase in productivity and value added of young firms.
- Allocative efficiency:
  - New export incentives and allocative efficiency (Hsieh and Klenow 2009) are positively associated in the short term (Figure 6, panel 3), suggesting reallocation toward high-productivity exporters.
- Patenting and technological transfers:
  - Export incentives are associated with a temporary 2 percent increase in received foreign patent applications that materializes in the second year and does not persist thereafter.
- Caveats and risks:
  - Export incentives may trigger retaliation by other countries because they can run counter to WTO rules, affecting sectoral performance.
  - Outcomes may improve over much longer horizons (example cited: Korea’s export-driven IPs over a 30-year horizon).

### Heterogeneous Impacts across Firms and Within-Sector Spillovers
- Younger and more financially constrained firms benefit more from IPs:
  - Firms split by age and by financial frictions (proxied by cash flow to assets; results robust to leverage ratio) show stronger responses among younger and more constrained firms.
- Implication:
  - IPs create winners and losers within targeted sectors, with potential within-sector spillovers that improve allocative efficiency when resources shift toward more productive firms.
  - A full assessment of aggregate welfare implications requires accounting for cross-sector reallocations of resources (not captured by within-sector measures).

### Innovation, Patents, and Technology Transfers
- Overall pattern:
  - An additional IP in a sector is associated with a 1.4 percent increase in received foreign patent applications in the short run, followed by a medium-term decline.
  - The rapid and short-lived effect suggests acceleration of patenting for innovations already in the pipeline rather than sustained development of new innovations.
- Instrument-specific effects:
  - Subsidies: 2 percent increase in received foreign patent applications in the first year (not lasting beyond the second).
  - Export incentives: 2 percent temporary effect in the second year.
  - Local inventor patents do not increase with IPs.

### Comparison with Structural Policies and Trade Liberalization
- Structural policies as a benchmark:
  - Structural policies (e.g., improving business environment, financial development, governance) target economy-wide frictions and do not discriminate across sectors.
  - These policies yield sizable economic dividends, are less reliant on precise sectoral information, likely entail lower fiscal costs, and can enhance tax collection.
- Relative effectiveness:
  - Improvements in financial development and governance have a disproportionate positive impact on sectors with high levels of distortions, and this differential impact is larger than that seen for IPs (Figure 8, panels 1 and 2).
  - Reforms streamlining business regulations have a more even positive effect across sectors.
- Trade-liberalizing policies:
  - An additional liberalizing policy is associated in the medium term with:
    - 1.6 percent higher productivity,
    - 1.2 percent higher value added,
    - 0.8 percent more payroll,
    - 0.4 percent more capital stock (the latter not statistically significant).
  - Lifting an additional import barrier (i.e., reducing trade restrictions) increases the number of received patent applications by 5 percent on average after four years (Figure 8, panel 4).
  - These results highlight that trade liberalization can produce uniform within-sector benefits, foster competition, scale economies, and support longer-term technological transfers.

### Policy-relevant implications and considerations
- Targeting and duration:
  - Short-lived protectionist IPs may accelerate existing innovation activity but are less likely to generate sustained local inventive activity.
  - Targeting younger and financially constrained firms can amplify capital accumulation and productivity gains, but creates distributional effects within sectors.
- Costs and risks:
  - Export incentives pose short-term productivity costs for average firms and risk triggering international retaliation.
  - Domestic subsidies have modest medium-term value added gains (1 percent) relative to typical industry growth (5.4 percent per year).
- Preference for structural reforms:
  - Where feasible, structural policies that improve credit access and governance may achieve larger and more evenly distributed gains with lower fiscal and distortionary costs than targeted IPs.
- Complementarities:
  - Combining export incentives with “soft” export-oriented interventions (trade-cost reductions, sector-specific infrastructure, credit and insurance, export promotion agencies) can reduce adjustment costs and mitigate risks associated with “heavy” IPs.

*Source: sdnea2025002 - 1. Domestic Subsidies 2. Export Incentives (IMF Staff Discussion Notes).*

### 4. Reductions in Trade Barriers and Patent Filings by

### 4. Reductions in Trade Barriers and Patent Filings by Foreign Inventors

### Conditions under which industrial policies (IPs) are associated with larger economic impacts
- IPs targeting sectors with higher distortions (high markups or high external financial dependence) are associated with stronger firm- and sector-level value added performance than IPs targeting low-distortion sectors.
- An additional protectionist IP is associated with a 4 percent increase in value added of highly distorted sectors in the medium term but no increase in value added of sectors with low distortions.
- Sectoral distortion measures are constructed using sector-level variables that strip out country-specific factors to reduce concerns that distortions reflect country-specific policies rather than technological sector characteristics.
- The analysis evaluates interactions at the 75th percentile (high distortion) and the 25th percentile (low distortion) of the sectoral distortion distribution.

### Relevance of the green transition and IPs
- Sectoral distortions are particularly relevant for sectors associated with the green transition, increasing their appeal as IP targets.
- IPs targeting green products are associated with larger increases in competitiveness and innovation than IPs targeting non-green products.
  - Example findings: IPs targeting green products yield larger medium-term increases in RCA compared to IPs targeting non-green products.
  - IPs motivated by climate change concerns are linked to a gradual and persistent increase in innovation from local inventors, with effects larger than those for other IPs.

### Complementarity with country fundamentals and heterogeneity across countries
- Structural fundamentals (governance quality, business environment, financial development, education) strengthen the link between IPs and firm performance by lowering risks of rent-seeking and improving targeting.
- Firms in countries with a better business environment experience higher capital accumulation in the short term in response to IPs.
- Firms in countries with more developed credit markets experience larger medium-term benefits from IPs.
- In EMDEs, firms in countries with better governance and higher human capital experience higher value-added growth after IP implementation, especially in the short term.
- The exercise defines high and low levels as the 90th percentile and 10th percentile of the emerging market and developing economies (EMDEs) distribution of each variable; these percentiles are computed using the full EMDE sample and the numbers in Figure 10 show out-of-sample values.

### Upstream versus downstream IPs and value chain spillovers
- IPs targeting upstream sectors (inputs/suppliers) are linked to increases in firm productivity, value added, and capital stock in downstream firms, reflecting positive cross-sectoral spillovers through input cost reductions and improved input quality.
- Downstream-targeted IPs can be negatively associated with firm performance, potentially because increased buyer productivity reduces demand for inputs.
- Both upstream and downstream liberalizing IPs (those fostering trade) are positively associated with firm performance in the medium term, despite short-term adjustments as firms form new foreign relationships.
- For major green value chains (wind turbines, solar panels, EVs), IPs targeting upstream products are linked to stronger improvements in RCA relative to IPs targeting downstream stages; downstream effects are more moderate and not statistically significant.

### Key quantitative comparisons and magnitudes
- An additional protectionist IP → 4 percent increase in value added for highly distorted sectors (medium term).
- IPs targeting highly distorted sectors → improvements in value added four times as large as IPs targeting low-distortion sectors.
- High/low evaluation percentiles used in exercises: 75th/25th for sectoral distortions; 90th/10th for EMDE structural variables.

### Policy considerations and recommended design principles
- Six broad principles for IP design (consistent with IMF guidance):
  1. Clearly target IPs: identify market failures, assess benefits, cross-sectoral spillovers, and alternative policies; prioritize upstream activities where appropriate; compare to structural policy alternatives.
  2. Ensure good governance and implementation capacity: strong bureaucratic capacity reduces capture and mis-targeting; weak institutions can render IPs ineffective or harmful.
  3. Complement with structural reforms: well-functioning business environments and developed credit markets increase likelihood of sustained gains; in EMDEs, stronger human capital raises IP effectiveness; consider a sequential approach (structural improvement first).
  4. Choose instruments carefully: subsidies often yield only short-term benefits and can foster mis-targeting or inward orientation; export incentives and outward-oriented measures have been important in successful cases but may conflict with WTO rules; “soft” interventions (reducing trade costs, export promotion agencies) can be effective.
  5. Consider fiscal costs and sunset clauses: subsidies can entail significant fiscal costs and sovereign-risk implications; policies should be time-bound to limit fiscal and general-equilibrium costs.
  6. Pursue international cooperation where feasible: IPs can generate negative spillovers and retaliation; cooperative design and transparency can mitigate welfare losses from unilateral actions and avoid wasteful duplication.

### Evidence from industry-level studies (selected magnitudes and outcomes)
- China shipbuilding policies (2006–2013): domestic investment boosted by 140 percent; long-term returns (present value of industry profits over size of subsidies) estimated at 18 percent; policy attracted inefficient producers and increased excess capacity; production and investment subsidies had high rates of return while entry subsidies were wasteful in this capital-intensive context.
- US EV tax credits (Inflation Reduction Act): improved vehicle electrification and benefited consumers and US automakers; estimated that 75 percent of the credits went to buyers who would have bought an EV without them; policy improved global environmental outcomes but, by focusing on US vehicles, hampered trade and foreign welfare.
- Local content requirements for EVs or batteries: tied to negative cross-border spillovers by limiting global learning-by-doing.
- Airbus case: government support (subsidized loans, reimbursable advances) yielded positive returns and innovation spillovers; estimated rate of return between 6 and 11 percent for Europe; Airbus entry reduced Boeing’s monopoly but generated cross-country spillovers.
- Semiconductors: government support has been vital for global industry growth, with subsidies a primary form of support; cross-border technology transfer occurs via FDI, collaborations, and licensing.
- Example of adverse spillovers: Boeing’s profits fell by about $100 billion due to EU actions, prompting US reciprocation and long WTO trade disputes.

*Source: STAFF DISCUSSION NOTES — Industrial Policies: Handle with Care (SDN/2025/002), International Monetary Fund.*

### Box 2. Green Industrial Policies: Arguments and Impacts

### Box 2. Green Industrial Policies: Arguments and Impacts

### Justifications for green industrial policies
- Two additional justifications for industrial policies (IPs) targeting products associated with the green transition (“green products”):
  - The novelty of low carbon technologies (LCTs): LCTs are new technologies that compete with established ones and require a transition away from old technologies, which demands coordination by consumers, producers, and the public sector. IPs could help coordinate actions to accelerate such a transition.
  - Emission externalities: LCTs’ private benefits are lower than social ones, leading to under provision of LCTs; IPs can help address this, especially when other instruments—such as carbon pricing—are initially politically difficult to put in place.

### Empirical evidence on competitiveness and innovation
- Impacts on revealed comparative advantage (RCA):
  - New IPs targeting green products increase RCA by about 20 percent after four years.
  - IPs targeting non-green products are associated with a short-term increase in RCA, but relatively smaller and non-significant effects in the medium term.
  - Evidence summarized in Box Figure 1, panel 1, which estimates the link between new IPs and RCA of low carbon technology (LCT) and non-LCT products using the local projection method.
- Impacts on patenting and innovation:
  - IPs motivated by climate policies are associated with a gradual and persistent increase in innovation from local inventors, exceeding 1 percent after five years.
  - This effect on patents is much larger than the effects found for non-green IPs (see Box Figure 1, panel 2).
  - Targeting green sectors increases the long-term benefits for innovation, in contrast to the muted effect of average IPs.
  - Findings are consistent with evidence linking IPs and patent applications in the electric vehicle sector and between environmental subsidies and green patents.

### Interpretation and caveats
- The analysis in this box considers only the individual country’s perspective.
- From a global welfare perspective, implementation of green IPs by countries behind the technology frontier could delay the green transition.
- The econometric approach:
  - Panel 1 and Panel 2 apply the local projection method; Panel 2 distinguishes new IPs motivated by climate change (green) versus not (non-green) and examines patent filings by local inventors.
  - CI = confidence interval.

### Key statistics and empirical outcomes (preserved exactly)
- "increase RCA by about 20 percent after four years"
- "exceeding 1 percent after five years"
- Box Figure 1 panels labeled: "1. IPs and RCA of LCT and non-LCT Products" and "2. Climate-Related IPs and Patent Filings by Local Inventors"

*Staff Discussion Note No. SDN/2025/002 — Box 2. Green Industrial Policies: Arguments and Impacts*

---


_Source: https://www.imf.org/-/media/files/publications/sdn/2025/english/sdnea2025002.pdf_