Ideas to Action:

Independent research for global prosperity

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December 22, 2015

The Role of Industrial Policy as a Development Tool: New Evidence from the Globalization of Trade-and-Investment

Emerging market countries that manage to diversify and upgrade their production and export base grow more rapidly and enjoy greater welfare gains than those that do not.  Foreign direct investment in manufacturing is concentrated in middle- and upper-skilled activities -- not lowest-skilled operations -- and thus offers many opportunities for structural transformation of the host economy.  But the challenge of using FDI to diversify and upgrade the local production and export base is fraught with market failures and tricky obstacles.  Contemporary debates about industrial policy as a development tool focus on how best to overcome these market failures and other difficulties.