Gulzar Natarajan on Industrial Policy for Large Investments

…the idea of attracting large manufacturers in ecosystem creating industries might be a promising strategy to adopt. An example is the Indian government’s push for Apple.

Industrial policy – what it is, what its benefits are, and what its limitations are – has been the focus of many an op-ed in the recent past. That, to me, is a signal to avoid reading most of them. But not because the topic itself isn’t important! On the contrary, industrial policy is the topic to learn more about if you are a student of the manufacturing sector in the Indian economy.

Why do I say so? Many reasons, but Gulzar Natarajan offers as good a summary as any I’ve read in the lead-up to the excerpt I’ve pasted above.

But in this post, Gulzar Natarajan points to a specific aspect of industrial policy:

Conventional wisdom would have it governments should not pick winners. India’s courting of Apple and mobile phones success is a good example that questions this wisdom. Mobile phones and Apple/Foxconn (and Samsung) are winners. Just as electric vehicles and Tesla, or semiconductor chips and Samsung/TSMC could be. Solar and wind power generation equipment manufacturers and defense manufacturers are another two examples. The same can be said of contract manufacturers Pou ChenFeng Tay, Hong Fu, Apache, etc in footwear, and Toray, etc in apparel. The facilities of these companies will be large enough to create a manufacturing ecosystem that has transformational impacts in its town or region. In fact, there’s a strong case that instead of spreading resources thin by targeting economy-wide measures like concessions and input subsidies, an outcomes-focused industrial policy for a government would be to identify a few winners (sectors and large brands or contract manufacturers) and court them. Success would be measured by the ability to get one of them to actually make a meaningful enough investment.

By the way, as regards footwear, here are my notes from an earlier Gulzar Natarajan post on the topic.

But to come back to the point being made in this post, he is making the point that one way to do industrial policy is not by targeting an entire sector, but rather by picking “winners”. By the way, for students looking to answer the question “but what should I be working on?”, he has an answer.

But what of the risks with such a strategy? He identifies four of them:

  1. You need to pick the “right” kind of winner, which is easier said than done.
  2. It could well lead to crony capitalism.
  3. This can be countered with effective state capacity, and we don’t have it.
  4. It could crowd out the focus on small and medium enterprises.

I would add a fifth, and it is my biggest worry with such a policy: what if the winner ends up being a dud? Do we have the capacity to be ruthless and play hardball? To me, it is this that was, and remains, the key differentiator between East Asia of the 60’s and India today.