Revisiting the Case for Industrial Policy

Executive Summary

Industrial policy has returned after decades of neglect. Once derided as “picking winners,” industrial policy has re-emerged across OECD countries as governments target strategic sectors, technologies, and value chains. The shift reflects growing global competition, the climate transition, and geopolitical pressures. While scepticism remains, the debate has moved from whether industrial policy is needed to how it should be designed and governed.

Theoretical justifications span multiple schools of thought. Neoclassical economics highlights market and coordination failures as rationales for intervention. Innovation economists stress uncertainty, learning-by-doing, and the need for patient capital. Heterodox traditions add macroeconomic and distributional dimensions, while complexity economics emphasises fostering high-value, high-complexity activities aligned with national capabilities. All perspectives converge on the need for state interventions when markets alone underprovide critical investment.

The US has embraced active industrial policy with federal fiscal firepower. Under President Biden, the Inflation Reduction Act, CHIPS and Science Act, and Infrastructure Investment and Jobs Act represent a decisive turn. These initiatives use large-scale subsidies and tax incentives to promote semiconductors, renewable energy, and electric vehicles. Strong federal fiscal capacity enables a centralized and ambitious approach, contrasting with the more fragmented European model.

The EU has taken steps but remains constrained by limited fiscal capacity. Programs and institutions such as Horizon Europe, the European Investment Bank, NextGenerationEU, and the Recovery and Resilience Facility have bolstered the green and digital transitions. Strategic legislation — including the Net-Zero Industry Act, European Chips Act, and Critical Raw Materials Act — marks clear priorities. Yet EU industrial policy relies heavily on member state financing, raising concerns about subsidy races that fragment the Single Market. Rising defence budgets are likely to make defence-related industrial policy the next strategic frontier.

Finland has joined the subsidy race, albeit cautiously. While Finnish governments avoided “picking winners” and focused on investing in education and R&D during the neoliberal era, governments have since adopted a more pragmatic stance on state intervention. The Orpo government introduced major subsidy and tax credit packages to attract green manufacturing investments, while the state has expanded its equity and venture capital investor role in growth companies. This reflects that global subsidy competition and EU industrial priorities are filtering down to the national level.

Policy recommendations

1. Acknowledge the strategic role of industrial policy in fostering green, digital, and security transitions.
2. Strengthen institutional capacity to mitigate lobbying risks and ensure that strategic choices are based on thorough analysis.
3. Coordinate EU and national subsidies to avoid market fragmentation and maintain a level playing field.
4. Balance fiscal and industrial objectives by aligning subsidy design with long-term productivity, employment, and climate goals.
5. Expand Finland’s policy toolkit with clear strategic priorities and greater emphasis on knowledge creation and planning capacity.