Unlike successful East Asian models, India's post-WWII industrial policy failed because it misunderstood a key ingredient: competition. Policymakers picked winners but failed to subject them to competitive pressures, either domestic or international. They viewed industrial policy as a purely organizational task, which ultimately proved ineffective for driving innovation and efficiency.
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When governments become top shareholders, corporate focus shifts from pleasing customers to securing political favor and appropriations. R&D budgets are reallocated to lobbying, and market competition devolves from building the best product to playing the policy game most effectively, strangling innovation.
Contrary to popular belief, the success of semiconductor industries in Taiwan and Korea isn't primarily due to massive government subsidies. Instead, their governments excel at creating an extremely stable and predictable business environment with streamlined permitting and minimal regulatory friction, which is more critical for long-term, capital-intensive projects.
These terms are not interchangeable. 'Pro-business' policies often protect incumbents through regulation, leading to cronyism and cartels. 'Pro-market' policies foster open competition, which is the best defense against corporate corruption and monopolies.
China's harsh, deflationary economic environment and intense domestic competition, while causing many companies to fail, effectively hones a select few into highly resilient and efficient champions. These survivors are now prepared for successful global expansion.
Attempting to beat China by mimicking its state-controlled industrial policies is a strategic failure. This approach politicizes the economy, breeds inefficiency, and plays to China's strengths. The U.S. wins by leveraging its own core advantage: out-innovating and out-competing through a market-driven system.
Unlike the U.S. government's recent strategy of backing single "champions" like Intel, China's successful industrial policy in sectors like EVs involves funding numerous competing companies. This state-fostered domestic competition is a key driver of their rapid innovation and market dominance.
The playbook of leveraging a large, low-cost workforce to become a manufacturing power is obsolete. Future competitiveness will be determined by automation density (robots per 100,000 people), making it impossible for nations like India to simply replicate China's industrial rise.
Unlike private enterprises, government-run entities are inherently inefficient. They lack the two fundamental drivers of improvement: market-based price signals and direct competition, which remove any incentive to innovate or improve.
Government intervention is most effective when targeting industries that meet three criteria: they must be critical to national security or the economy, compromised by foreign dependence or choke points, and fundamentally changeable through targeted financial incentives that can shift their long-term economics.
Contrary to the Western perception of a monolithic state-run system, China fosters intense competition among its provinces. Provincial leaders are incentivized to outperform each other, leading to massive, parallel innovation in industries like EVs and solar, creating a brutally efficient ecosystem.
