Another way to promote a domestic industry: have your life depend on it! Ukraine now does final assembly of almost all the drones they use in combat and are signing deals with Gulf states to collaborate on interceptor drones.
If our leaders were smart we'd be seeking out their assistance too.
- Don't underestimate the capacity of countries to screw up even something simple like "just do FDI". After all, the Zona Franca de Manaus has plenty of FDI (Honda, Yamaha, Samsung are all there) and yet, because of it's fundamental problems, it's still a very costly failure for Brazil!
- Don't underestimate the politics of these policies. In a lot of countries, subsidies have a strong tendency to last a lot longer than they should as lobbying from firms/local governments/trade unions extend their length far longer than originally designed.
- Don't underestimate the issue of fortuitous geography. I think the 2 strongest cases you provide for FDI, Malaysia and Poland, plus the case of South Korea (which is a bit different) all benefited greatly from being close enough to other successful countries so as to being integrate well into supply chains and things. Latin America (sans Mexico) and most of Africa really struggle in comparison.
That said, I very much welcome your key message here: Industrial Policy can be successful and more countries should consider doing it carefully. With the emphasis being: carefully.
Also 100% agree with the issue that Industrial Policy has far too many things under it's banner. Import Substitution is dramatically different from Export led Growth and it's probably a good a idea to focus more on specific policies than this huge umbrella.
Also appreciate your thoughts on China.
Finally, as a encompassing point here. One can potentially find that any tool can be used well if used wisely. That's true for virtually any policy one can think of. The key issue is: wisely. I think one question that I haven't seen answered yet is: which types of industrial policy are the most likely to work well in bad/unwise/hard political environments. After all, a country with a wise/good government is already doing a lot right, in all likelihood; the biggest difference can, hopefully, come in countries without that benefit.
In re geography, while real physical geography is yes something not to abstract away from (hello Brexiteers), Malaysia is a peculiar citation for "close" - close to who? By kilometers.... They do have of course great trade physical infrastructure. Which most of Africa lacks well-operating basics (ports too often inefficient messes, inland messes... cost-on-cost from bad infra all around)
A boat takes what, a couple of days from Kuala Lumpur to Singapore? Maybe a week to Honk Kong? Even Tokyo is probably within two weeks and, as you correctly point out, the infrastructure is very good. And these are all port cities. Polish cities, of course, are even better connected for the most part. And Seoul, even better.
Compare to shipping from Santos (not, say São Paulo or other industrial cities in São Paulo state) to Buenos Aires (something like 10 days and is a port city), about two weeks to Valparaiso (and is not Santiago) or over two weeks to Veracruz (again, isn't, say, Mexico City). Overland routes are even worse, for the most part. This complicates any integration greatly.
African countries, I don't even want to look up since I know it's much worse; even getting to the ports is hard in many cases, admittedly, as you correctly point, due to the infrastructure problem is even more severe.
My point is just that this absence of favourable trade geography (which better infrastructure can help mitigate, but only to an extent) complicates one significant aspect that all 3 countries seem to have, but other non-Asian countries (in particular) won't.
My point thne is saying Malaysia is close to other successful countries I don't think is really true analytically.
West AFrica countries are about as physically close to Europe by sea, but their trade infrastructure is catastrophic mostly - never mind the quite true observations in other replies about contracts enforceability. If one's sea ports are garbage and one has crap internal infra (rail, roads, both...)...
Once upon a time some years ago a development agency I won't name wanted to engage me for advice on some cockamamie scheme for setting up a regional development VC fund for a beneficiary country. I told them "I'll tell you for free what you need for this. Build a road." If you can't move your goods.
In S Korea and Japan a key was having politically connected corporate conglomerates who could subjugate suppliers and labour, against a backdrop of mercantilism and protectionism, and corporate leaders who wanted to build empires successfully in country rather than try to skim off of the success and offshore the funds
There are really very few countries I can think of where this approach can be replicated.
Your point about FDI promotion being more replicable than building national champions resonates with something deeper: the reason Poland and Malaysia succeeded with FDI wasn't just business-friendly policies—it was contract enforcement infrastructure.
The development economics literature obsesses over visible interventions (subsidies, tariffs, state champions) while systematically ignoring the invisible foundation: can you actually enforce the contracts that complex supply chains require? China's manufacturing dominance wasn't built on cheap labor alone—it was built on a legal system that made just-in-time delivery contracts, quality control provisions, and IP licensing agreements *enforceable*.
Bangladesh's pharmaceutical sector is facing this right now with LDC graduation. The moment TRIPS exemptions expire, companies need to negotiate licensing agreements with international patent holders. But there's no domestic court that can adjudicate these disputes in under 5 years. Result: multinationals won't sign agreements governed by Bangladeshi law, exports face regulatory barriers, and a $4B industry built over decades starts collapsing.
The standard "build local capacity" response is delusional. Bengal had world-class common law courts during the Raj—the Calcutta High Court produced precedent cited across the Empire. That system was systematically destroyed post-independence through political appointments and bar bloating. India, with 70+ years of democracy and constitutional protections, couldn't prevent the same degradation (50M pending cases, 163rd/190 for contract enforcement). Why would incremental reform succeed where democratic accountability failed?
This is where industrial policy thinking becomes useful: treat legal infrastructure like you'd treat any other missing input. You don't wait 30 years to build domestic steel capacity when you can import it. The Satyapur proposals (linked below) apply that logic to commercial courts—create a privately-funded jurisdiction with borrowed judicial credibility (Singapore appeals, Malaysian Islamic finance expertise), transition to local judges over 30 years through mandatory mentorship, and make it voluntary so it competes on quality rather than coercion.
The "neocolonial" objection is intellectually bankrupt when Bangladesh already depends on World Bank conditionalities, IMF structural adjustment, and exports millions of workers to Gulf quasi-servitude. Using Singaporean arbitrators for pharmaceutical licensing disputes is import substitution for legal infrastructure—bringing home the activity that currently flows to Singapore holding structures.
Industrial policy for developed countries is technology policy (your AI point). Industrial policy for developing countries should be *contract enforcement policy*—because without it, no amount of FDI promotion, subsidies, or export orientation can scale beyond simple assembly.
Great piece on industrial policy! Your point about technology policy being industrial policy for developed countries resonates with a reform proposal I've been working on for Bangladesh.
The logic: instead of government directly funding R&D through bureaucratic institutions, let firms decide what research they need and let universities compete to provide it. The tax subsidy makes it cheaper for firms to contract universities than to do everything in-house, while forcing universities to develop commercially relevant research capabilities.
This creates multiple benefits: (1) research funding flows to universities with genuine capacity rather than political connections, (2) industry-academia linkages develop organically, (3) universities gain financial incentives to build research teams that can attract contracts, and (4) firms get access to university talent pools while universities get revenue streams independent of government whims.
Chile tried a version of this with matching funds for industry-contracted research and saw measurable increases in university-industry collaboration within a decade. For developing countries trying to build technology capacity, this seems more promising than creating government research institutes that rarely produce commercially viable outputs.
Curious if you've seen similar approaches work elsewhere, particularly in the Asian context you write about?
Noah, I think you're overlooking a fundamental scaling problem with the Chinese vertical integration model.
What works at the provincial level or in small countries tends to collapse under its own weight at national scale. The issue isn't just size—it's institutional pathology. Every organization develops its own hiring biases, its own project approval heuristics, its own intellectual blind spots. When you vertically integrate across an entire national innovation system, you're not creating efficiency; you're systematically eliminating the diversity of thought necessary for breakthrough innovation. You end up concentrating rather than distributing epistemic risk.
I should clarify something about my Bangladesh proposal, because I think there's been a misunderstanding. What I advocated was precisely the opposite of vertical integration. I've been deeply skeptical of government-directed R&D projects, particularly in developing contexts, because of the extraordinary discretion they grant to public agencies. The literature on isomorphic mimicry is instructive here—you get institutions that perform the rituals of innovation without generating actual discoveries. They look like research organizations, they spend like research organizations, but the selection mechanisms are fundamentally broken.
If you genuinely want national coordination on ambitious technical problems, prize mechanisms offer a far superior approach. Here's why: China can afford to duplicate efforts across multiple competing teams because it has the scale and resources to tolerate apparent inefficiency. But that "waste" is actually preserving optionality—keeping alive different technical approaches, different organizational models, different theories of the problem. The Maoist slogan about letting a hundred flowers bloom was economically catastrophic in its original context, but as an innovation strategy, it contains a kernel of wisdom.
The moment you vertically integrate and centralize authority, you're making a massive concentrated bet on one institution's judgment, one committee's vision of what constitutes promising research. That's extraordinarily fragile. You're optimizing for short-term coordination at the expense of long-term adaptability.
Industrial policy is also alive and well at the state level within the U.S. Here in SC, successive state governments have made FDI a priority, leveraging the port of Charleston and a largely non-unionized workforce. Other Southern states have adopted this model as well. In SC, the result is of course well-known, with BMW, Michelin, Bosch, Volvo, and Mercedes (Sprinter vans) all now with manufacturing facilities in the state. And precision domestic manufacturing has followed as well, most notably Boeing’s 787 plant at the Charleston airport.
In the Charleston MSA alone, today one can buy a locally-manufactured boat (Scout, Sportsman, Sea Hunt, et al), put it on a locally-manufactured trailer, hitch it behind a locally-assembled car (Mercedes Sprinter van), and load it all onto a locally-built aircraft (Boeing 787). Or one could just ship the assemblage out from the port here instead. That’s localized industrial policy at work.
I totally agree with you that people need to be more specific when they say industrial policy. As you said industrial policy can be many things, from making a state-owned enterprise in cars or computers, to tariffs, to import restrictions, to tax credits, to forcing banks to make loans cheap, to your military being a preferred purchaser of domestic businesses, to FDI promotion. Saying industrial policy obscures more than it reveals. Some industrial policy fails terribly and others have more success.
Sadly, the real differentiator is execution, which is driven by a country's political economy. For example, Nigeria and South Korea both courted FDI under military rule to make cars, but took vastly different paths.
South Korea's Hyundai was bolting together imported Ford Cortina kits in its Ulsan plant in the late 1960s. In 1974, Park Chung-hee made his car industry promotion plan which set a target of 95% local content. Crucially, this was paired with an aggressive export-focused policy. If a foreign firm increased its local content supply chain, the firm could get more tax breaks/cheap loans to build more cars. If the firm wasn't increasing their suppliers locally or wasn't expanding production they missed subsidies. The next year, in 1975, Hyundai made the Pony, its first original model, the engine and transmission and many parts were still foreign made, but the supplier base was being forced to localize under Park's 95% local content target. Over time Hyundai owned the production and Koreanized the components year by year.
In Nigeria's case, Nigeria courted FDI basically after the Biafra war to serve an inward-looking domestic market. Nigeria also had plenty of car investment in the 1970s: French Peugeot made cars in Kaduna (the Muslim North), Volkswagen made Beetles in Lagos(Yoruba Southwest), Mercedes-Benz made trucks in Anambra (Igbo Southeast), Steyr made tractors in Bauchi(Muslim North), and Leyland made trucks in Ibadan (Yoruba Southwest).
But instead of focusing on local supply chains, Nigeria focused on domestic ownership because Nigerians felt European ownership of all the major industries was a different type of colonialism. Under military rule under Gowon and later Obasanjo, they did "Indigenization" decrees where foreign firms had to sell partial ownership stakes to the federal or local government or to Nigerian businessmen. While it gave Nigerians more ownership, it didn't do anything about the foreign firms sourcing from local suppliers.
Furthermore, Nigeria's macroeconomic environment actively worked against localization. Because of the oil windfall & the Central Bank's strong currency policy, the Naira was cartoonishly overvalued (at times stronger than the dollar). It was relatively cheaper to import parts than to build a supplier network & buy from them.
Instead of local Nigerians making the chassis, transmission, engines and other car parts. Those factories in Nigeria would use the central bank's foreign reserves to import parts from France (Peugeot), Germany (Volkswagen, Mercedes), or Britain (Leyland). Then the Nigerian workers in those factories would bolt the imported parts together like Legos. The local content laws in Nigeria were very small. By 1982, Nigeria's local content requirements were ~15%, but after 1981, Nigeria was in a balance of payments crisis due to low oil prices, and by 1982 Nigeria had roughly 30 days worth of reserves. The Central Bank couldn't wire foreign reserves to pay for imports, and then the factories went idle because they had no more parts.
While the oil price collapse and Dutch Disease were devastating, Nigeria's failure was ultimately one of policy design & poor incentives. Had Nigeria prioritized genuine local supply chains and the heavy industries required to support them, rather than just putting local names on the ownership papers, there might have been some localized industrial learning left standing after the foreign exchange dried up.
So yes, industrial policy matters, but the devil is in the details of the specifics, how to execute better, and dealing with the political economy of the country.
Excellent column. I'd like to make a couple of points from my experiences in Pittsburgh:
First, comparative advantage can be path dependent. Pittsburgh has a relatively vibrant robotics and self-driving vehicle industry, with enough of a critical mass of people that ease of recruiting and skills of the population make up a comparative advantage on its own. The seed for these companies was probably created in the early 1980s when CMU's Robotics Institute started combining vision understanding and other AI research with mechanical engineering to build some interesting robotics applications. Similarly, CMU's Andrew Project and the NSF's Pittsburgh Supercomputing Center spurred innovation in large scale high performance data storage systems, which has also led to a local concentration of expertise.
Second, a good local job market is important for expanding those seeds of comparable advantage. I've worked at a few local data storage companies, and in the late 1980s, when the first such company started, recruiting people was very difficult. Candidates would ask what local alternatives existed in case the storage startup failed, and our answers were less than compelling: "Maybe you could become a research programmer at CMU or the University of Pittsburgh?" Fast forward a few decades, and there are sizable local Google and NetApp development centers, lots of robotics and AI startups, and a self-driving truck company (Aurora).
These examples are probably exemplars of FDI, where "foreign" relative to Pittsburgh can be generalized to larger companies based in other areas, research funding from the US government agencies like the NSF, and VC funding.
Interesting reflection. from a practical investor-observer PoV, I would suggest in re this there is insight: "Why would it be easier to get rich through FDI than by building your own brands? I can think of a couple of reasons. For one thing, FDI is less risky — instead of having the government pick winners, you let multinationals try building a bunch of things in your country. It’s a way to let the market discover comparative advantage, while the government simply assumes that some sort of competitive advantage exists within the broad category of export manufacturing."
The incoming FDI typically ends up building up local international level expertise at many different levels (workers all the way to mid-managers) that in my experience ends up pulling operational capacity upwards from the baseline (whereas the Walled Garden protected industries tend to be shambolically traditional).
And the closing comment on the financial system (of which impacts on bank-centric usual bases) is very wise, looking forward to that follow-up
When I think of Ireland, I first think of Guinness, but I’ll allow Kerrygold. It is surprising that I can’t think of any Polish, Singaporean or Malaysian brands at all.
Joe Studwell has recently released a new book: How Africa Works. I can highly recommend it. Secretly hoping Joe and Noah will to a podcast series on it :)
Just a general comment from an elderly interested reader with an ancient background in econ and development..
Excellent column and excellent comments. It is a real joy to read a collection of thoughts that are themselves thoughful and non-idealogical. Please everyone, keep up the good work and verbal/written restraint.
I hate the saying "the truth is somewhere in the middle" which, while a decent rule of thumb for when you hear two sides of a story from friends: is not as applicable to policy. Sometimes a policy is just bad.
I am a conservative Liberal. I believe in free markets, but it's undeniable that there are times the government needs to get involved. I support the government helping important industries, and my preference is to take the lightest touch possible to achieve it, and use the most effective means. For instance: the Biden industrial policy tried to accomplish too much. Biden wanted to build important industries, but he also wanted to advance a social agenda using those industries. Those two goals conflicted and wound up not fully succeeding at both. I'd rather the US just provide support to make chips and do social policy elsewhere.
I hate industrial policy that is a substitute for social policy. Subsidizing industrial as did Obama with Solyndra is a terrible notion and usually doomed to failure. I also despise Trump's choice of industries he doesn’t like, like his cancellation of green energy projects. Markets are best.
However, if we think of industrial policy more as national security, I think the government can do smarter things. Our shipbuilding capacity is crappy. Part of why is our budgeting process. Continuing resolutions and government shutdowns have led to our military-industrial complex becoming moribund.
Things like reforming NEPA to prevent interminable lawsuits that are designed to kill projects, reforming our judicial system in total to prevent lawyers from just figuring out how to make money off of suing companies, would help move things along.
The Japanese are environmentalists. Getting FDI from a shipbuilding company and saying your yard is your yard, abide by your environmental rules, and US hiring practices come here and build our ships would be beneficial to both countries.
We lured TMSC here; let’s hope it works out. Finally, politicians should do everything possible to smooth the way for items that have national security implications. That doesn’t mean putting a 50% tariff on aluminum. Canada is an ally and was once friendly with America. If our per capita cost of labor and environmental rules keep US aluminum makers uncompetitive, then we should make use of our partnerships.
Government contracts also "subsidized" the built out of the Internet, by providing a relatively large early market for a lot of the networking hardware infrastructure required. The government subsidizes university research programs, which often lead to commercial applications. Not all government subsidies are bad.
As a recent article in the WSJ about Electric Boat in Groton, CT says, besides having the shipyard, you also need the employees. They are trying to hire 8000 workers to build submarines, but because of lack of housing (due to zoning and regulations) and poor highway and transit connections in southeast Connecticut they can’t find enough workers. They also suffer from knowledgeable older workers retiring and nobody to train the new recruits.
A potential new option for developing countries is emerging: leapfrogging.
New technologies allow bypassing traditional (and costly) infrastructure. So traditional power grids become microgrids. Heavy industry (factories) becomes light industry (3D printers), telecommunications becomes Starlink (or similar), and educational institutions become AI.
Ultimately these emerging countries will make the costly investments, but leapfrogging gets them on the growth curve faster and cleaner.
If you intentionally build industrial parks and infrastructure to support multinationals, give them targeted regulatory relief and tax breaks, and arrange for them to get bank loans, how is that not industrial policy? 😉
Yeah, but FDI is a catch-all term. It could simply mean, be hospitable from a regulatory, tax and legal point of view to foreign investors. That's what a classical liberal would say. Or it could mean what you just said, *some of* which isn't classical liberalism at all. I think "FDI" needs a different term for the point you're making. Because, further, building infrastructure and industrial parks, particularly those which the private sector could undersupply, is precisely what a classical liberal would tell you to do.
Another way to promote a domestic industry: have your life depend on it! Ukraine now does final assembly of almost all the drones they use in combat and are signing deals with Gulf states to collaborate on interceptor drones.
If our leaders were smart we'd be seeking out their assistance too.
A few thoughts, Noah.
- Don't underestimate the capacity of countries to screw up even something simple like "just do FDI". After all, the Zona Franca de Manaus has plenty of FDI (Honda, Yamaha, Samsung are all there) and yet, because of it's fundamental problems, it's still a very costly failure for Brazil!
- Don't underestimate the politics of these policies. In a lot of countries, subsidies have a strong tendency to last a lot longer than they should as lobbying from firms/local governments/trade unions extend their length far longer than originally designed.
- Don't underestimate the issue of fortuitous geography. I think the 2 strongest cases you provide for FDI, Malaysia and Poland, plus the case of South Korea (which is a bit different) all benefited greatly from being close enough to other successful countries so as to being integrate well into supply chains and things. Latin America (sans Mexico) and most of Africa really struggle in comparison.
That said, I very much welcome your key message here: Industrial Policy can be successful and more countries should consider doing it carefully. With the emphasis being: carefully.
Also 100% agree with the issue that Industrial Policy has far too many things under it's banner. Import Substitution is dramatically different from Export led Growth and it's probably a good a idea to focus more on specific policies than this huge umbrella.
Also appreciate your thoughts on China.
Finally, as a encompassing point here. One can potentially find that any tool can be used well if used wisely. That's true for virtually any policy one can think of. The key issue is: wisely. I think one question that I haven't seen answered yet is: which types of industrial policy are the most likely to work well in bad/unwise/hard political environments. After all, a country with a wise/good government is already doing a lot right, in all likelihood; the biggest difference can, hopefully, come in countries without that benefit.
In re geography, while real physical geography is yes something not to abstract away from (hello Brexiteers), Malaysia is a peculiar citation for "close" - close to who? By kilometers.... They do have of course great trade physical infrastructure. Which most of Africa lacks well-operating basics (ports too often inefficient messes, inland messes... cost-on-cost from bad infra all around)
Yes, that's pretty much what I mean.
A boat takes what, a couple of days from Kuala Lumpur to Singapore? Maybe a week to Honk Kong? Even Tokyo is probably within two weeks and, as you correctly point out, the infrastructure is very good. And these are all port cities. Polish cities, of course, are even better connected for the most part. And Seoul, even better.
Compare to shipping from Santos (not, say São Paulo or other industrial cities in São Paulo state) to Buenos Aires (something like 10 days and is a port city), about two weeks to Valparaiso (and is not Santiago) or over two weeks to Veracruz (again, isn't, say, Mexico City). Overland routes are even worse, for the most part. This complicates any integration greatly.
African countries, I don't even want to look up since I know it's much worse; even getting to the ports is hard in many cases, admittedly, as you correctly point, due to the infrastructure problem is even more severe.
My point is just that this absence of favourable trade geography (which better infrastructure can help mitigate, but only to an extent) complicates one significant aspect that all 3 countries seem to have, but other non-Asian countries (in particular) won't.
My point thne is saying Malaysia is close to other successful countries I don't think is really true analytically.
West AFrica countries are about as physically close to Europe by sea, but their trade infrastructure is catastrophic mostly - never mind the quite true observations in other replies about contracts enforceability. If one's sea ports are garbage and one has crap internal infra (rail, roads, both...)...
Once upon a time some years ago a development agency I won't name wanted to engage me for advice on some cockamamie scheme for setting up a regional development VC fund for a beneficiary country. I told them "I'll tell you for free what you need for this. Build a road." If you can't move your goods.
In S Korea and Japan a key was having politically connected corporate conglomerates who could subjugate suppliers and labour, against a backdrop of mercantilism and protectionism, and corporate leaders who wanted to build empires successfully in country rather than try to skim off of the success and offshore the funds
There are really very few countries I can think of where this approach can be replicated.
Your point about FDI promotion being more replicable than building national champions resonates with something deeper: the reason Poland and Malaysia succeeded with FDI wasn't just business-friendly policies—it was contract enforcement infrastructure.
The development economics literature obsesses over visible interventions (subsidies, tariffs, state champions) while systematically ignoring the invisible foundation: can you actually enforce the contracts that complex supply chains require? China's manufacturing dominance wasn't built on cheap labor alone—it was built on a legal system that made just-in-time delivery contracts, quality control provisions, and IP licensing agreements *enforceable*.
Bangladesh's pharmaceutical sector is facing this right now with LDC graduation. The moment TRIPS exemptions expire, companies need to negotiate licensing agreements with international patent holders. But there's no domestic court that can adjudicate these disputes in under 5 years. Result: multinationals won't sign agreements governed by Bangladeshi law, exports face regulatory barriers, and a $4B industry built over decades starts collapsing.
The standard "build local capacity" response is delusional. Bengal had world-class common law courts during the Raj—the Calcutta High Court produced precedent cited across the Empire. That system was systematically destroyed post-independence through political appointments and bar bloating. India, with 70+ years of democracy and constitutional protections, couldn't prevent the same degradation (50M pending cases, 163rd/190 for contract enforcement). Why would incremental reform succeed where democratic accountability failed?
This is where industrial policy thinking becomes useful: treat legal infrastructure like you'd treat any other missing input. You don't wait 30 years to build domestic steel capacity when you can import it. The Satyapur proposals (linked below) apply that logic to commercial courts—create a privately-funded jurisdiction with borrowed judicial credibility (Singapore appeals, Malaysian Islamic finance expertise), transition to local judges over 30 years through mandatory mentorship, and make it voluntary so it competes on quality rather than coercion.
The "neocolonial" objection is intellectually bankrupt when Bangladesh already depends on World Bank conditionalities, IMF structural adjustment, and exports millions of workers to Gulf quasi-servitude. Using Singaporean arbitrators for pharmaceutical licensing disputes is import substitution for legal infrastructure—bringing home the activity that currently flows to Singapore holding structures.
Industrial policy for developed countries is technology policy (your AI point). Industrial policy for developing countries should be *contract enforcement policy*—because without it, no amount of FDI promotion, subsidies, or export orientation can scale beyond simple assembly.
---
Satyapur I: https://mdnadimahmed888222.substack.com/p/satyapur-the-delaware-of-bangladesh
Satyapur II: https://mdnadimahmed888222.substack.com/p/satyapur-ii
Yes, re contract enforceability. and it is interesting to think about legal infrastructure as subject for industrial policy.
Great piece on industrial policy! Your point about technology policy being industrial policy for developed countries resonates with a reform proposal I've been working on for Bangladesh.
In my Fifteen-Point Reform Manifesto (link -https://mdnadimahmed888222.substack.com/p/the-fifteen-point-reform-manifesto?utm_source=share&utm_medium=android&r=o2bbq), I propose replacing traditional public R&D spending with tax subsidies for university research contracted by private firms (domestic and international). Universities would receive a 50-75% tax credit on the value of research contracts they attract from companies.
The logic: instead of government directly funding R&D through bureaucratic institutions, let firms decide what research they need and let universities compete to provide it. The tax subsidy makes it cheaper for firms to contract universities than to do everything in-house, while forcing universities to develop commercially relevant research capabilities.
This creates multiple benefits: (1) research funding flows to universities with genuine capacity rather than political connections, (2) industry-academia linkages develop organically, (3) universities gain financial incentives to build research teams that can attract contracts, and (4) firms get access to university talent pools while universities get revenue streams independent of government whims.
Chile tried a version of this with matching funds for industry-contracted research and saw measurable increases in university-industry collaboration within a decade. For developing countries trying to build technology capacity, this seems more promising than creating government research institutes that rarely produce commercially viable outputs.
Curious if you've seen similar approaches work elsewhere, particularly in the Asian context you write about?
Did you see this one?
https://www.noahpinion.blog/p/china-has-invented-a-whole-new-way
Noah, I think you're overlooking a fundamental scaling problem with the Chinese vertical integration model.
What works at the provincial level or in small countries tends to collapse under its own weight at national scale. The issue isn't just size—it's institutional pathology. Every organization develops its own hiring biases, its own project approval heuristics, its own intellectual blind spots. When you vertically integrate across an entire national innovation system, you're not creating efficiency; you're systematically eliminating the diversity of thought necessary for breakthrough innovation. You end up concentrating rather than distributing epistemic risk.
I should clarify something about my Bangladesh proposal, because I think there's been a misunderstanding. What I advocated was precisely the opposite of vertical integration. I've been deeply skeptical of government-directed R&D projects, particularly in developing contexts, because of the extraordinary discretion they grant to public agencies. The literature on isomorphic mimicry is instructive here—you get institutions that perform the rituals of innovation without generating actual discoveries. They look like research organizations, they spend like research organizations, but the selection mechanisms are fundamentally broken.
If you genuinely want national coordination on ambitious technical problems, prize mechanisms offer a far superior approach. Here's why: China can afford to duplicate efforts across multiple competing teams because it has the scale and resources to tolerate apparent inefficiency. But that "waste" is actually preserving optionality—keeping alive different technical approaches, different organizational models, different theories of the problem. The Maoist slogan about letting a hundred flowers bloom was economically catastrophic in its original context, but as an innovation strategy, it contains a kernel of wisdom.
The moment you vertically integrate and centralize authority, you're making a massive concentrated bet on one institution's judgment, one committee's vision of what constitutes promising research. That's extraordinarily fragile. You're optimizing for short-term coordination at the expense of long-term adaptability.
Industrial policy is also alive and well at the state level within the U.S. Here in SC, successive state governments have made FDI a priority, leveraging the port of Charleston and a largely non-unionized workforce. Other Southern states have adopted this model as well. In SC, the result is of course well-known, with BMW, Michelin, Bosch, Volvo, and Mercedes (Sprinter vans) all now with manufacturing facilities in the state. And precision domestic manufacturing has followed as well, most notably Boeing’s 787 plant at the Charleston airport.
In the Charleston MSA alone, today one can buy a locally-manufactured boat (Scout, Sportsman, Sea Hunt, et al), put it on a locally-manufactured trailer, hitch it behind a locally-assembled car (Mercedes Sprinter van), and load it all onto a locally-built aircraft (Boeing 787). Or one could just ship the assemblage out from the port here instead. That’s localized industrial policy at work.
I totally agree with you that people need to be more specific when they say industrial policy. As you said industrial policy can be many things, from making a state-owned enterprise in cars or computers, to tariffs, to import restrictions, to tax credits, to forcing banks to make loans cheap, to your military being a preferred purchaser of domestic businesses, to FDI promotion. Saying industrial policy obscures more than it reveals. Some industrial policy fails terribly and others have more success.
Sadly, the real differentiator is execution, which is driven by a country's political economy. For example, Nigeria and South Korea both courted FDI under military rule to make cars, but took vastly different paths.
South Korea's Hyundai was bolting together imported Ford Cortina kits in its Ulsan plant in the late 1960s. In 1974, Park Chung-hee made his car industry promotion plan which set a target of 95% local content. Crucially, this was paired with an aggressive export-focused policy. If a foreign firm increased its local content supply chain, the firm could get more tax breaks/cheap loans to build more cars. If the firm wasn't increasing their suppliers locally or wasn't expanding production they missed subsidies. The next year, in 1975, Hyundai made the Pony, its first original model, the engine and transmission and many parts were still foreign made, but the supplier base was being forced to localize under Park's 95% local content target. Over time Hyundai owned the production and Koreanized the components year by year.
In Nigeria's case, Nigeria courted FDI basically after the Biafra war to serve an inward-looking domestic market. Nigeria also had plenty of car investment in the 1970s: French Peugeot made cars in Kaduna (the Muslim North), Volkswagen made Beetles in Lagos(Yoruba Southwest), Mercedes-Benz made trucks in Anambra (Igbo Southeast), Steyr made tractors in Bauchi(Muslim North), and Leyland made trucks in Ibadan (Yoruba Southwest).
But instead of focusing on local supply chains, Nigeria focused on domestic ownership because Nigerians felt European ownership of all the major industries was a different type of colonialism. Under military rule under Gowon and later Obasanjo, they did "Indigenization" decrees where foreign firms had to sell partial ownership stakes to the federal or local government or to Nigerian businessmen. While it gave Nigerians more ownership, it didn't do anything about the foreign firms sourcing from local suppliers.
Furthermore, Nigeria's macroeconomic environment actively worked against localization. Because of the oil windfall & the Central Bank's strong currency policy, the Naira was cartoonishly overvalued (at times stronger than the dollar). It was relatively cheaper to import parts than to build a supplier network & buy from them.
Instead of local Nigerians making the chassis, transmission, engines and other car parts. Those factories in Nigeria would use the central bank's foreign reserves to import parts from France (Peugeot), Germany (Volkswagen, Mercedes), or Britain (Leyland). Then the Nigerian workers in those factories would bolt the imported parts together like Legos. The local content laws in Nigeria were very small. By 1982, Nigeria's local content requirements were ~15%, but after 1981, Nigeria was in a balance of payments crisis due to low oil prices, and by 1982 Nigeria had roughly 30 days worth of reserves. The Central Bank couldn't wire foreign reserves to pay for imports, and then the factories went idle because they had no more parts.
While the oil price collapse and Dutch Disease were devastating, Nigeria's failure was ultimately one of policy design & poor incentives. Had Nigeria prioritized genuine local supply chains and the heavy industries required to support them, rather than just putting local names on the ownership papers, there might have been some localized industrial learning left standing after the foreign exchange dried up.
So yes, industrial policy matters, but the devil is in the details of the specifics, how to execute better, and dealing with the political economy of the country.
https://yawboadu.substack.com/p/nigerias-petro-diplomacy-during-the
Excellent column. I'd like to make a couple of points from my experiences in Pittsburgh:
First, comparative advantage can be path dependent. Pittsburgh has a relatively vibrant robotics and self-driving vehicle industry, with enough of a critical mass of people that ease of recruiting and skills of the population make up a comparative advantage on its own. The seed for these companies was probably created in the early 1980s when CMU's Robotics Institute started combining vision understanding and other AI research with mechanical engineering to build some interesting robotics applications. Similarly, CMU's Andrew Project and the NSF's Pittsburgh Supercomputing Center spurred innovation in large scale high performance data storage systems, which has also led to a local concentration of expertise.
Second, a good local job market is important for expanding those seeds of comparable advantage. I've worked at a few local data storage companies, and in the late 1980s, when the first such company started, recruiting people was very difficult. Candidates would ask what local alternatives existed in case the storage startup failed, and our answers were less than compelling: "Maybe you could become a research programmer at CMU or the University of Pittsburgh?" Fast forward a few decades, and there are sizable local Google and NetApp development centers, lots of robotics and AI startups, and a self-driving truck company (Aurora).
These examples are probably exemplars of FDI, where "foreign" relative to Pittsburgh can be generalized to larger companies based in other areas, research funding from the US government agencies like the NSF, and VC funding.
Interesting reflection. from a practical investor-observer PoV, I would suggest in re this there is insight: "Why would it be easier to get rich through FDI than by building your own brands? I can think of a couple of reasons. For one thing, FDI is less risky — instead of having the government pick winners, you let multinationals try building a bunch of things in your country. It’s a way to let the market discover comparative advantage, while the government simply assumes that some sort of competitive advantage exists within the broad category of export manufacturing."
The incoming FDI typically ends up building up local international level expertise at many different levels (workers all the way to mid-managers) that in my experience ends up pulling operational capacity upwards from the baseline (whereas the Walled Garden protected industries tend to be shambolically traditional).
And the closing comment on the financial system (of which impacts on bank-centric usual bases) is very wise, looking forward to that follow-up
Kerrygold is a pretty well-known Irish brand.
Also Jameson, Bushmills, and Guinness
When I think of Ireland, I first think of Guinness, but I’ll allow Kerrygold. It is surprising that I can’t think of any Polish, Singaporean or Malaysian brands at all.
Luksusowa Vodka, but its sales pale in comparison to other major vodka brands.
U2? The Pogues?
Ryanair
Joe Studwell has recently released a new book: How Africa Works. I can highly recommend it. Secretly hoping Joe and Noah will to a podcast series on it :)
Just a general comment from an elderly interested reader with an ancient background in econ and development..
Excellent column and excellent comments. It is a real joy to read a collection of thoughts that are themselves thoughful and non-idealogical. Please everyone, keep up the good work and verbal/written restraint.
I hate the saying "the truth is somewhere in the middle" which, while a decent rule of thumb for when you hear two sides of a story from friends: is not as applicable to policy. Sometimes a policy is just bad.
I am a conservative Liberal. I believe in free markets, but it's undeniable that there are times the government needs to get involved. I support the government helping important industries, and my preference is to take the lightest touch possible to achieve it, and use the most effective means. For instance: the Biden industrial policy tried to accomplish too much. Biden wanted to build important industries, but he also wanted to advance a social agenda using those industries. Those two goals conflicted and wound up not fully succeeding at both. I'd rather the US just provide support to make chips and do social policy elsewhere.
We can't be too dogmatic on economics. Good post
Noah
I hate industrial policy that is a substitute for social policy. Subsidizing industrial as did Obama with Solyndra is a terrible notion and usually doomed to failure. I also despise Trump's choice of industries he doesn’t like, like his cancellation of green energy projects. Markets are best.
However, if we think of industrial policy more as national security, I think the government can do smarter things. Our shipbuilding capacity is crappy. Part of why is our budgeting process. Continuing resolutions and government shutdowns have led to our military-industrial complex becoming moribund.
Things like reforming NEPA to prevent interminable lawsuits that are designed to kill projects, reforming our judicial system in total to prevent lawyers from just figuring out how to make money off of suing companies, would help move things along.
The Japanese are environmentalists. Getting FDI from a shipbuilding company and saying your yard is your yard, abide by your environmental rules, and US hiring practices come here and build our ships would be beneficial to both countries.
We lured TMSC here; let’s hope it works out. Finally, politicians should do everything possible to smooth the way for items that have national security implications. That doesn’t mean putting a 50% tariff on aluminum. Canada is an ally and was once friendly with America. If our per capita cost of labor and environmental rules keep US aluminum makers uncompetitive, then we should make use of our partnerships.
Government contracts also "subsidized" the built out of the Internet, by providing a relatively large early market for a lot of the networking hardware infrastructure required. The government subsidizes university research programs, which often lead to commercial applications. Not all government subsidies are bad.
As a recent article in the WSJ about Electric Boat in Groton, CT says, besides having the shipyard, you also need the employees. They are trying to hire 8000 workers to build submarines, but because of lack of housing (due to zoning and regulations) and poor highway and transit connections in southeast Connecticut they can’t find enough workers. They also suffer from knowledgeable older workers retiring and nobody to train the new recruits.
https://www.wsj.com/us-news/the-seaside-town-trying-to-reclaim-its-title-as-submarine-capital-of-the-world-60e23981
Yeah Buzz. It is an F ing mess
I would love to see more profiles of developing countries’ economies. Those are the pieces that led me to become a paying subscriber.
A potential new option for developing countries is emerging: leapfrogging.
New technologies allow bypassing traditional (and costly) infrastructure. So traditional power grids become microgrids. Heavy industry (factories) becomes light industry (3D printers), telecommunications becomes Starlink (or similar), and educational institutions become AI.
Ultimately these emerging countries will make the costly investments, but leapfrogging gets them on the growth curve faster and cleaner.
Calling FDI industrial policy seems unreasonable to me. Any classical liberal would say that too.
If you intentionally build industrial parks and infrastructure to support multinationals, give them targeted regulatory relief and tax breaks, and arrange for them to get bank loans, how is that not industrial policy? 😉
Yeah, but FDI is a catch-all term. It could simply mean, be hospitable from a regulatory, tax and legal point of view to foreign investors. That's what a classical liberal would say. Or it could mean what you just said, *some of* which isn't classical liberalism at all. I think "FDI" needs a different term for the point you're making. Because, further, building infrastructure and industrial parks, particularly those which the private sector could undersupply, is precisely what a classical liberal would tell you to do.