The Rise of Industrial Policies: A Strategic Analysis

Expanding tariffs may be capturing the headlines, but industrial-policy measures are on the rise as well. Governments have long implemented subsidies, incentives, and other interventions in domestic economies to support employment, critical manufacturing, and other national priorities. However, as the establishment of the World Trade Organization and the expansion of global trade made free-market and free-trade policies the global norm, many countries put less emphasis on supporting domestic industries. The COVID-19 pandemic and rising geopolitical tensions, which intensified economic and global supply chain vulnerabilities, reversed that trend. Between 2017 and 2024, global industrial-policy actions increased by approximately 390 percent, with a particular focus on critical industries such as defense, semiconductors, and high-end equipment.

Such measures can significantly affect the economic environment in which businesses operate, including market access (through export and import restrictions, for example), labor availability (through interventions such as workforce development initiatives), core business operations, and the economics of capital investments (via investment subsidies, for instance). In some industries, government incentives are so sizable that they alter the competitive balance: In 2023, subsidies for battery technologies represented nearly 30 percent of global battery revenues.

As companies grapple with today’s complex geopolitical landscape, understanding the full scope of government incentives can help business leaders both maximize returns on investments and navigate the competitive dynamics in global markets.

Those who integrate industrial-policy considerations into strategic decisions can reduce their costs of capital, minimize risk in priority innovation projects, and find new avenues for growth.

A brief history of industrial policy

Governments pursue industrial policies to advance economic and geopolitical interests. While tariffs, import and export restrictions, and regulatory barriers all play a role in shaping domestic industries, in this article we focus on three forms of industrial policy:

• Fiscal incentives: tax-related benefits that create advantages for specific industries or companies and policies regulating foreign direct investment, such as ownership thresholds and sector restrictions
• Financial incentives: subsidies, grants, loans, loan guarantees, and other financial instruments that subsidize certain market activities by lowering companies’ cost base or otherwise improving their business cases
• Market promotion: actions that stimulate demand or help create more favorable market conditions (through direct procurement or price stabilization, for example) for target industries or companies

Over the years, these instruments have helped numerous countries realize their economic and geopolitical aspirations. The US Apollo program, for example, used government procurement, direct R&D investment, and other incentives to mobilize roughly 20,000 companies and academic institutions in support of winning the “space race.” A decade later, South Korea’s interventions, such as easing access to foreign credit, credit subsidies, and export promotion, fueled its rise as a heavy-industry and advanced-manufacturing giant.

Recent shifts in global industrial policies

In recent years, geopolitical trends have led some developed economies to revisit their industrial policies. China’s economic rise has intensified its technological and economic competition with leading Western economies. More recently, pandemic-related supply chain disruptions highlighted the importance of robust domestic capabilities and spurred government efforts to encourage “onshoring” of production. The disruption to global energy markets following Russia’s invasion of Ukraine has increased governments’ focus on domestic energy security. Meanwhile, the broad escalation of geopolitical tensions has triggered additional government investments in defense and security. Germany has gone so far as to recently alter its constitution to allow for hundreds of billions of euros in additional defense spending.

Against this backdrop, it is important for business leaders to differentiate between government stimulus aimed at developing domestic industries and targeted policy interventions motivated by geopolitical factors. For example, many governments subsidize their agriculture sectors, but these measures are generally independent of the prevailing geopolitical climate. By contrast, recent US government support for the domestic semiconductor industry has clear geopolitical implications: It helps reduce US companies’ reliance on the importation of advanced semiconductors, which are used in numerous defense and communications technologies governments deem vital to national security.

While industrial-policy initiatives can create opportunities for businesses, CEOs need to understand the scope and applicability of various programs. The questions we commonly hear include:

• Which industries, technologies, and geographies receive government incentives today?
• Are these incentives sizeable enough to influence the competitive balance within our industry?
• How can we build a resilient business case for a new capital investment around an incentive if the relevant program may be subject to change?
• How might the incentive landscape change in the coming months and years?

How governments are pursuing geopolitical industrial policies

Financial incentives are the most prevalent means of advancing geopolitically motivated industrial policies, comprising roughly three-quarters of all measures (Exhibit 1). They include grants, loans, capital injections, trade financing, and import incentives, among other instruments.

Of the 12 economies we studied, China deployed the most financial incentives: In 2019, China represented 78 percent of all financial incentives offered by the governments we studied. The United States’ use of such measures also increased—by 33 percent per year—between 2017 and 2020, with particularly strong growth in the post-COVID-19 period (Exhibit 2). Even so, the United States’ use of financial incentives remains below that of China.

Aside from financial incentives, governments are increasingly applying both market promotion measures and fiscal incentives to stimulate certain sectors. The use of the former has grown by approximately 40 percent a year between 2017 and 2023 (as shown in Exhibit 1 above)—more than double the growth rate of financial and fiscal incentives over the same period. China is among the largest users of all types of industrial-policy interventions, having made approximately 2.5 times more interventions per dollar of GDP than the United States in 2023.

Recent industrial policies have tended to focus heavily on specific industries and technologies. Our review of subsidies in 2023 and 2024 found that 13 product categories (among 26 categories we assessed) accounted for 96 percent of global incentive value, and the five largest categories represented roughly two-thirds of the top 13 categories’ total incentive value (Exhibit 3).

Defense (including items on the US government’s “common high-priority items list”) and high-end equipment (such as medical devices, construction equipment, and electrical components) are currently drawing the greatest number of interventions. These sectors’ shares of government incentives are also growing faster than those of any other industry (Exhibit 4).

Our analysis further shows several categories, some of them nascent, receiving growing government support. The three most notable are batteries, hydrogen energy, and iron and steel:

• Batteries: Chinese companies produce roughly two-thirds of the world’s battery cells and largely control global supply chains for critical battery inputs and minerals. As sales of electric vehicles, consumer electronics, drones, and other technologies increase demand for lithium-ion batteries, current lithium supplies will likely prove insufficient, with forecasts projecting a 55 percent shortage by 2030. Given these constraints, governments could seek to catalyze innovation in next-generation batteries with different chemistries or architectures. This shift may already be underway: Since 2020, government interventions in battery technologies other than lithium-ion and fuel cell have increased at a rate of approximately 80 percent per year—double the growth rate in the 2017–20 period.
• Hydrogen energy: Hydrogen is emerging as a potential sustainable fuel that can help economies diversify their energy sources. While green-hydrogen adoption is currently curtailed by high production costs and limited infrastructure, some projections suggest it will be a trillion-dollar industry by 2050. As of December 2023, public and private sector entities have committed roughly $570 billion in direct investments to large-scale hydrogen projects, and the number of government interventions in the hydrogen sector has grown by an average of 18 percent per year between 2017 and 2023.
• Iron and steel: Iron and steel have long been central to the industrial policies of the world’s largest economies. In January, the US government blocked an acquisition, citing concerns over national security and domestic economic competitiveness, and more recently, it enacted 25 percent global tariffs on steel imports. Similarly, the Indian government has proposed a tax on steel imports to counter large inflows of lower-cost foreign steel. These are not isolated actions: Globally, iron and steel industries rank among the largest recipients of government incentives, with approximately 2,000 interventions since 2017.

Navigating the opportunities and risks of industrial incentives

This new era of industrial incentives could have implications for many companies. Business leaders should consider taking three steps to make the most of renewed government support: widely exploring available incentives, assessing potential trade-offs those incentives may entail, and comparing their organizations’ use of incentives with that of their competitors.

Exploring incentive eligibility across geographies and government levels

Companies may be eligible for numerous public sources of capital to support their growth and innovation. Business leaders should look beyond high-profile federal incentive programs (such as the US CHIPS and Science Act) and explore regional, state, and local government initiatives. Intel, for example, made strategic moves across its regional operations that made it eligible for major US federal programs (last year, the prior US administration announced a $7.9 billion grant through the CHIPS and Science Act for the construction of advanced manufacturing plants in four states) and EU initiatives (the European Commission committed $1.9 billion toward the construction of an Intel assembly and test plant in Poland). The company has also identified regional opportunities—for example, it received an approximately $600 million “reshoring” grant from the state of Ohio.

A deep understanding of available incentives can also help business leaders select the best ways to diversify their supply chains and manufacturing footprints. When US chipmaker Micron sought to expand in India, for example, it was able to leverage subsidies from the country’s federal and state governments covering more than 70 percent of its capital investment in a new chip manufacturing plant in Gujarat. Such assessments of global industrial policies will become increasingly important as companies seek to optimize their operations in response to increasing tariffs and trade barriers.

Using scenarios to evaluate the trade-offs associated with incentives

It’s important to consider industrial policy alongside other government interventions. Business leaders should weigh the benefits of accessing government resources against execution constraints, such as potential export restrictions or local sourcing requirements. While quantifying these trade-offs in advance can be difficult, especially in terms of secondary and tertiary impacts, understanding their implications can help companies make decisions about geographic expansion, R&D investment, and product diversification, among other topics.

Consider the trade-offs a solar power manufacturer in India might face. The company could be eligible for subsidies and guaranteed electricity purchase agreements under India’s National Solar Mission. However, to sustain access to this government support, it would have to meet domestic-content provisions for the sourcing of solar cells and modules. Although this may not materially affect the project’s business case, it could limit the company’s supply chain flexibility (as in the case of a supplier bankruptcy or production disruptions). Similarly, a manufacturer thinking of relocating a production facility to another country to take advantage of incentives may find itself facing labor shortfalls due to local hiring requirements. Or consider a company that enters a new market where the government offers attractive industrial incentives. This company could find itself triggering export restrictions on intellectual property developed in that country, which would limit synergies across its global operations.

In addition, while subsidies can boost the economic feasibility of investments or expansion strategies in the near term, business leaders should remember that such support can suddenly be reduced or revoked. Incentives alone are thus insufficient to underpin a full business case. Decision-makers should scrutinize the business case through multiple lenses, including conducting rigorous commercial diligence to determine whether a given sector or technology would be viable without large-scale government support.

Benchmarking industrial-policy support against competitors

In heavily subsidized industries, incentives can reshape the competitive balance—especially if significant disparities in support exist among countries. As such, business leaders should understand how their companies stack up to their peers regarding eligibility for and use of incentives. Competitive benchmarking can reveal how effectively a company is tapping available programs compared with its competitors and help leaders assess where industrial policy is reshaping the competitive dynamics. As with the trade-off analysis, the benchmarking should consider a range of scenarios, including the potential impact of new actions and changes to existing policies.

Conclusion

The recent increase in government support for domestic industries presents significant opportunities for businesses that understand how industrial policy is reshaping markets. That knowledge can, in turn, help them boost the ROI on their investments and identify new opportunities. However, industrial policies also entail pitfalls, requiring business leaders to assess the implications of using government interventions on their operations, footprint, and strategic goals.

FAQ

Q: How can companies navigate the complexities of industrial policies?

A: Companies can navigate industrial policies by exploring available incentives, evaluating trade-offs, and benchmarking against competitors.

Q: What are the key trends in global industrial policies?

A: Recent trends include a focus on critical industries, such as defense and high-end equipment, as well as growing support for emerging sectors like batteries, hydrogen energy, and iron and steel.

References

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