1 Introduction

In this paper, we address the question of how develo** countries are responding to recent trends in scholarly work and actual policymaking practice on industrial policy. On the one hand, there is the perceived revival in the interest in industrial policy, which is permeating instances where reference to such a term would have been uncommon only few years ago (Cherif et al. 2022; Cherif and Hasanov 2019). On the other hand, we acknowledge debates around many of the woes that can be associated with policies actively targeting industrial development, for example, the risk to foster rent seeking behaviors or the danger of introducing market distortions and disincentives to efficiency and innovation (Rodrik 2004, 2009; The Economist 2021). Thus, a salient feature in the resurgence of industrial policy is the expectation that the provision of public aid for industrial development should glean lessons and avoid pitfalls from the past.

Geopolitics plays a growingly important role. Former ideological stances against industrial policies are giving way to a growing interest in rekindling industrialization at home, amidst the emergence of a multipolar world order where industrialization and concerns about globalization as we know it (Wong and Tucker 2023; Irwin 2023) are increasingly intertwined with national security concerns and the scope for policy practices in several economic realms (Sullivan 2023).

Develo** countries are confronted with shifts in the nature and structure of global production towards increased presence of digitalization or the greening of the economy and short-term effects linked to post-pandemic recovery, together with crises derived from international conflict, macroeconomic instability, and a turn in the tide on industrial policy in highly industrialized countries. The landscape for the industrial development journey of develo** countries is in a state of flux. Despite significant differences in the conditions for industrialization across develo** regions, develo** countries are confronted with opportunities, but also complex challenges in the path of industrialization. The ways in which they can insert themselves into regional and/or global supply chains have changed.

Against this backdrop, there is room to debate on the possible roles and the nature of industrial policies in develo** countries. This includes consideration of the policy space available to them to address emerging opportunities and challenges. Likewise important is reflection on how the international community can support develo** countries in their quest for structural transformations, as it is needed to leverage industrialization for the achievement of intended development goals.

In addressing our research question, in this paper, we also seek to derive practical implications for multilateral organizations such as the UN Industrial Development Organization (UNIDO), with a mandate to promote industrial development. Requests for industrial policy advice are increasing as the industrialization agendas are lagging behind in several develo** countries Those countries are at serious risk of missing the SDG9-related targets (UNIDO 2023). There is a need to integrate and scale up different industrial policy advisory services while at the same time fostering knowledge sharing and multilateral learning, networking, and partnership building to inform operational efforts more systematically around new approaches to industrial policies.

The evidence presented in the paper draws from recent industrial policies and strategies and consultations with policymakers and regional experts. The aim is to pin down key characteristics of industrial policies that are amenable for inclusive and sustainable industrial development under the ongoing trends and challenges facing countries. We glean lessons and provide some recommendations for industrial policy practice.

The remainder of this paper proceeds as follows. Section 2 takes stock of ongoing debates that substantiate the revival of industrial policy. This section consists of two parts. First, a brief discussion on the background of industrial policy resurgence. Second, an overview of recent industrial policy programs in advanced and rapidly industrializing economies. Section 3 presents some industrial development challenges that develo** countries face and their implications for industrial policy in these countries. The inclusion of a brief assessment on progress on SDG9 serves to advocate for SDGs as tools to guide novel approaches to industrial policy. Section 4 analyzes the landscape of industrial policy in develo** regions, looking into emerging trends and priorities, and the possible impact of industrial policy measures by advanced countries. Drawing from the preceding discussion, in Section 5 concludes, while advancing few lessons and recommendations for industrial policy practice in develo** countries.

2 The Revival of Industrial Policy

Recent years witness a renewed interest in industrial policy as a driver of development, technological autonomy, and, increasingly, resilience against unexpected shocks (OECD 2022; UNIDO 2021). This interest has been translated into action. For example, UNCTAD (2018) documents that some 84 countries, which account for 90% of global GDP, had adopted some form of industrial policy between 2013 and 2018.

More recently, Juhász et al. (2023) document that the number of countries adopting industrial policy measures more than doubled between 2009 and 2019. According to their analysis, this trend is most evident in industrialized countries: high-income countries implement about five times as many industrial policies, on average, as develo** countries. The lack of fiscal depth affecting most develo** economies seems to explain, to a significant extent, the skewedness in the use of industrial policies towards high-income countries, which tend to deploy a larger set of tools involving financial assistance in foreign markets, public procurement and capital injection and equity stakes.

In what follows we review, first, some reasons behind the observed revival of industrial policy, focusing on those countries which are leading the race. Then, we look into how develo** countries are reacting to this trend.

2.1 The Background of Industrial Policy Resurgence

The literature recognizes several factors behind the recent revival of industrial policy. Here, we focus on four: the global financial crisis of 2008–2009, the new technological race around digital technologies, the imperative of achieving a green transition, and the economic rivalry between USA and China.

The 2008–2009 financial crisis led to a collapse in world trade. Exports and imports went into negative territory for virtually all products, and more markedly for products integrated into value chains such as machinery. The financial crisis caused a shock “characterized by a prolonged slowdown in the pace of trade reform, and weakening political support for open trade amid rising geopolitical tensions” (Aiyar and Ilyina 2023). At the same time, it resulted in the recognition that unfettered market forces and globalization are seldom conducive to inclusive economic outcomes. This recognition prepared the ground for a new consensus towards the need for industrial policy.

An additional trend over the last decade is the acceleration of technological progress around advanced digital production technologies. Advanced technologies such as AI and robotics are transforming industrial processes and driving changes in value chains and industries. The advance in digital technologies can be observed through increased robotization in industrial production, which reached a ratio of 6 robots per worker in 2021 compared to 2 in 2009 (Altenburg and Haraguchi 2022). Successful digitalization generally depends on the industrial sector’s absorptive capacity, implying the need for co-investment in skills and infrastructure development, supportive industrial policies, and a healthy business environment, thereby raising the barriers to entry (UNIDO 2019; Andreoni et al. 2021; Santiago et al. 2023).

Climate change and the urgent need to move towards clean energies are driving trends towards the greening of industrial production. While it was short lived, the COVID crisis, in particular containment, showed it was possible to reduce emissions by reducing transport use (Altenburg and Haraguchi 2022). The COVID crisis has further emphasized the importance of reducing dependency, particularly for oil-dependent countries. New opportunities are opening up for renewable energies.

The significance of the twin transition towards greening and digitalization for socio-economic transformation cannot be underestimated. In these specific areas, markets are prone to failure because of negative externalities related to greening and due to positive externalities in the field of digitalization stemming from the need for investments in training and knowledge accumulation, as well as the monopolistic market power of platform companies.

Last but not least, growing rivalry between the United States and China is affecting value chains and investor confidence, threatening to result in geo-economic fragmentation in foreign direct investment (FDI) flows and reductions in global output by up to 2% in the long term (IMF 2023). IMF (2023) asserts that the risk of fragmentation in FDI results from the observation that the share of FDI between geopolitically aligned countries is greater than that between other countries. This risk is compounded by trends towards “friend-shoring,” driven by changes in corporate interest to reduce exposure to specific markets, and supported by national security measures (IMF 2023; Sullivan 2023). Governments, particularly from industrialized countries, are providing incentives—openly coercing firms even—to relocate production to trusted countries thereby making supply chains less vulnerable to geopolitical tensions. Increasing consideration of economic resilience and national securities in trade and industrial policies emerges as a salient feature of the renewed interest in industrial policy.

2.2 Increase in Industrial Policy Use by Advanced and Rapidly Industrializing Countries

Proactive use of industrial policies and their interplay with policies to promote technology and innovation absorption, development, and use have historically played a major role in explaining economic development in highly industrialized and rapidly industrializing countries (Oqubay et al. 2020; Park et al. 2021; Cherif and Hasanov 2019). It is unsurprising that several advanced countries are resorting to a mix of industrial and other policies to respond to the shifting environment around industrial development that we witness today (Table 1). Examples of this are France’s commitments to reindustrialize through the reshoring of productive activities and support of innovation in strategic industries (Kirchner 2021) or the European Union’s new Green Deal, which is expected to transform the European economy towards 2030 and beyond. Competitiveness and prosperity should reconcile environmental protection, advancing technological and industrial sovereignty, digitalization of manufacturing, enhanced energy efficiency, and the greening of industry (European Commission 2020). In the case of China, as one of the fastest industrializing countries in the world, the explicit embrace of industrial policies has been known for years. Large scale initiatives under the Made in China 2025 framework constitute some of the most recent manifestation of systematic subsidies to targeted industries. Recent efforts, however, are interpreted as an attempt at fostering “dual circulation,”Footnote 1 focused on reducing external dependence by strengthening domestic sourcing by local firms, and the drive for self-sufficiency in key technologies (Irwin 2023).

Table 1 Summary of recent initiatives and plans and industrial policy programs in advanced industrial economies
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In 2022, two major industrial policy-related events took place in the United States (US). First, adoption of the Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS and Science Act) (The White House 2022), as a multi-billion initiative to make the US a leader in new technologies, particularly by boosting semiconductors research, development, and production. An ambitious incentives package aims to reduce dependency and compete with China in these areas. In the long term, the US government expects to enhance supply chains resilience by reducing exposure to military conflicts or natural disasters in Asia, while boosting the economic dynamics and job creation in the US (Kannan and Feldgoise 2023). Second, the adoption of the Inflation Reduction Act (IRA) (Senate of the United States 2022), which aims to slow down inflation by reducing the public deficit, while fostering development of renewable energies, and addressing climate change. The IRA should help reduce energy costs, create new jobs, and contribute to reducing CO2 emissions (Lashof et al. 2022), while countering the risk of militarization of the supply chains and reduce China’s influence. (Sullivan 2023).

The adoption of these two major pieces of legislation lends support to Wade’s (2012) identified paradox that results from the fact that while public policy discourse tends to advocate a “market fundamentalist” narrative and an acceptance of “market forces,” the US government has, in fact, been quite active in the use of industrial policy. Best (2020) further supports to this conclusion. He notes the US government’s strong promotion of major technological innovations—such as Internet—often linked to the defense industrial complex, or the uptake of legacy practices from key agencies leading the World War II effort, into other departments of the federal government. These agencies eventually became responsible for leading ambitious scientific and technological infrastructures, which linked government agencies, industry, university, and government laboratories, and business enterprises (Best 2020).

The world has received the CHIPS and Science Act and the IRA, respectively, with mixed feelings. These two ambitious industrial policy programs are tensioning the relationship between the US and some of its traditional partners. The European Union (EU), for example, considers the IRA a threat for European companies operating in the US, while the US decries the EU’s high tariffs on US cars and the low development of clean energy technologies (Wong and Tucker 2023; Kreps and Timmers 2022). Eventually, the EU adopted its own EU CHIPS Act in 2022, which frames Europe’s ambition to become a technological leader, ensuring future competitiveness and security of supply chains (European Commission 2023). While the US and European strategies coincide in their emphasis on significantly expanding climate spending to achieving net-zero targets, they differ substantially in their approaches. While in the US the IRA is an incentives approach, in the EU, the approach is mainly through regulation mechanisms.

By contrast, according to Wong and Tucker (2023), some positive aspects emerge from those initiatives. Notably, an outstanding shift in the position and commitment of the US government to fight climate change. According to the authors, the IRA’s push for “Make in America” does not necessarily imply products should be made in the US by American firms, thus undermining the basis for European fears. Essentially, Wong and Tucker (2023) see opportunities for US-EU mutual benefit should the two regions collaborate and coordinate their respective green industrial policy programs, thereby generating space for investment and job creation opportunities in both sides of the Atlantic.

A more structural narrative begins to emerge around a “new Washington Consensus”Footnote 2 (Sullivan 2023, 1), suggesting commitments towards strategically repositioning manufacturing and innovation as drivers of long-term development in the United States. According to Mr Jake Sullivan, National Security Advisor of the Biden’s Administration, this strategy “invests in the sources of [the United States] economic and technological strength, that promotes diversified and resilient global supply chains, that sets high standards for everything from labor and the environment to trusted technology and good governance, and that deploys capital to deliver on public goods like climate and health” (Sullivan 2023, 1). This new consensus, roughly summarized in Table 2, hails to a new era of partnerships and alliances where the United States aspires to remain both as the center and the main driving force of a multipolar world.

Table 2 Key elements of the new Washington Consensus
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This “small-yard high-fence” approach focuses government interventions in selected strategic areas while kee** other areas accessible to international trade (Sullivan 2023). However, the demarcation between the fenced small yard and the rest could become blurred, and economic resilience and national security considerations could have wider implications for bilateral trade and ODA relations.

A major concern stemming from the revival of industrial policy is the perceived escalation in the intensity of the United States-China trade tensions and their race for supremacy in strategic high-tech industries. The situation is taking a turning point following the United States restrictions on China and ensuing ban by Bei**g, announced on May 21, 2023, on the import of certain chips from the semiconductor company, Micron, which is the first United States producer and the third largest in the world (Escande 2023). Competitive stances and geopolitical rivalry should remain for the foreseeable future. While different scenarios suggest that the Chinese economy, measured in terms of GDP, may overtake that of the United States by 2050, the question mark is on China’s readiness to remain in such leading position in the long term (The Economist 2023).

Notwithstanding the emerging consensus that nobody would win from an open United States-China trade confrontationFootnote 3 (Adegboye et al. 2020; Carlomagno and Albagli 2022; Misra and Choudhry 2020), there is room to discuss the way forward for develo** countries, including opportunities for industrialization at the national and regional level. The literature identifies several possible implications for develo** countries. In the short term, develo** countries which are well integrated into global value chains (GVCs) could derive positive impacts, as they occupy the free space left by either party involved in the tension, benefiting from an increased demand for products with characteristics similar to those affected (Misra and Choudhry 2020; Chadha et al. 2021). In the long term, however, negative impacts could involve GVCs disruption and diversion of trade away from develo** countries, uncertainty and shifts in investment flows, and poverty increases (Freund et al. 2019; Carlomagno and Albagli 2022). Taking sides seems the least profitable option (Adegboye et al. 2020; Irwin 2023). Instead, enhanced regional cooperation, through existing mechanisms to spur trade and access to technology and financing, could be more profitable for develo** countries (Irwin 2023).

Enhanced cooperation on industrial development-related matters, including industrial policy, among develo** countries of the Global South, may help those countries draw maximum benefits from the United States-China tensions. This can be a key lesson learnt from the cold-war era when the South was unable to counteract the United States-Soviet rivalry due to the small economic weight and political instability of the South at that time. Recent experiences related to regional or multi-country pooling of strategic public procurement to improve access to essential medicines in Latin America or efforts around the Africa Medical Supplies Platform (AMSP), which helped to facilitate access to an African and global base of screened manufacturers and procurement collaborators to fight the COVID-19 pandemic, can be leveraged to inform future collaboration between develo** countries (UNIDO 2021) and between these and more advanced industrialized countries.

3 Challenges Facing Develo** Countries

3.1 Limited Progresses on SDGs

Industrial policy targets usually span beyond specific support to one particular industry or sector. From the classic infant industry arguments to more recent elaborations on societal progress,Footnote 4 the rationale has always been the transformation in economic structures to increase the long-run wellbeing of nations. A novel element in today’s approaches to industrial policy is endorsement of the common development goals enshrined in the United Nations’ agenda around the Sustainable Development Goals (SDGs). This comprehensive set of goals can give directionality to industrial policy in line with national priorities by countries.

Modern approaches to industrial policy are expected to contribute to accelerating progress towards the achievement of the SDGs (UNIDO 2021; Ferrannini et al. 2021). The starting point is to look at the SDG which is specifically related to industrialization, innovation, and resilient infrastructure, the SDG9. In what follows, we present recent evidence on the progress achieved by different develo** regions in addressing this particular goal.Footnote 5

Figure 1 shows the performance of different country groups in terms of the three components of SDG 9—industry, innovation, and infrastructure—based on a composite index which uses official UN SDG indicators. Among the three components of SDG 9, the largest differences between advanced and develo** countries refer to innovation performance. While the scores across all develo** regions and country groups indicate an underperformance in innovation relative to developed countries, Africa, Latin America, and the least developed countries (LDCs) trail significantly behind other develo** regions as well.

Fig. 1
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Progress towards SDG 9 across country groups by region and income level. 2021. Source: UNIDO elaboration based on UNDESA Global SDG Indicators Data Platform. Note: The value shows a composite index which captures the distance to target of a group of SDG 9 official indicators under each dimension. Data refers to 2021. Country groups and regional averages are weighted by population

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Infrastructure is one of the key contributing factors for industrial development (Haraguchi et al. 2019). Progress on this dimension shows a more balanced picture across regions and groups with Eastern Europe in the lead. All groups, including developed countries, however, still have ample room for progress by 2030.

Finally, the index that measures inclusive and sustainable industrial development reveals varied levels of advancement among groups. Asia-Pacific is at the forefront of the develo** regions, while Arica is trailing behind. The gap between emerging countries and LDCs is also substantial.

This evidence underscores the urgent need for develo** countries to explore how modern approaches to industrial policies can help them accelerate progress towards SDG9 and the UN Agenda 2030. Industrial policies cannot simply replicate policies from the past. Lessons learnt from the cumulative cross-country experience of the last 50 years (and beyond) suggest at least four elements that need to be integrated into modern industrial policy (UNIDO 2023):

  1. 1.

    Mission oriented: they should target broad missions shared among all stakeholders and place the achievement of selected SDGs at the center;

  2. 2.

    Partnerships: they should place public-private collaboration at the core of policy formulation and implementation;

  3. 3.

    Forward looking: they should leverage on the transformative trends around digitalization, decarbonization, and recalibration of global supply chains;

  4. 4.

    Cross-border: they should be coordinated at regional and global level to benefit from larger markets while avoiding race-to-the-bottom dynamics across neighboring nations.

The notion of industrial policies which are forward looking is particularly important for the discussion in this paper. Accordingly, in what follows, we discuss in more detail the three transformative trends which are resha** the global industrial landscape and their implications for future industrial policy. These megatrends impose new challenges for develo** countries, while presenting them with important windows of opportunity to accelerate progress through well-crafted industrial policy.

3.2 Advanced Digitalization and the Fourth Industrial Revolution

In the ongoing fourth industrial revolution, technological change entails not only digitalization, but also stimulated the emergence of automation technology. Several ground-breaking technologies began to converge in the late twentieth century, for example, software, novel materials, more dexterous robots, and a series of web-based services. These technologies paved the way for advanced technologies such as deep machine learning, Internet of Things, artificial intelligence (AI), robotics, and humanoid robotics, i.e., the newly emerging technologies of the current industrial revolution.

In the past decade, the global industrial robot density has tripled, while the number of patents focused on artificial intelligence has soared in the last 5 years (UNIDO 2021 and 2023). The fourth industrial revolution has been led primarily by a handful of industrialized countries and China. They own the majority of shares in develo** and using new technologies, steering the course of innovation in processes and products that leverage these technologies. African countries allocate only 1.1% of their GDP towards digital transformation (such as internet infrastructure and networks), whereas developed nations typically spend an average 3.2% of GDP (UNEN 2023).

Not only are there significant differences in digitalization across countries, but also within individual countries. In every country, despite the differences between countries, advanced technology spreads more quickly in large firms. Thanks to their resources and capabilities, large corporations have more investments in new technologies, enabling them to lead technological advancement (UNIDO 2019). In contrast, SMEs face a digital gap due to challenge such as lack of knowledge and awareness, skills gaps, financial limitations, and a lack of supportive resources like organizational strategies or digital tools (Kergroach 2021). In most countries, SMEs have a dominant presence in industrial activities. The significance of SMEs cannot be underestimated, as they not only dominate the business and industrial scene in many countries and regions, but also serve as key players in the supply chains of major corporations and contribute to inclusive development. A nation’s pursuit of digitalization will have minimal impact on its economy and employment and may harm the long-term industrial competitiveness of the country without the development of an industrial ecosystem that includes large corporations and digitally equipped SMEs, along with infrastructure investments and a supportive business environment.

Advanced digital production (ADP)Footnote 6 technologies boost productivity, stimulate innovation, and support the growth of knowledge-intensive business services (KIBS) by integrating KIBS into manufacturing processes. The adoption of ADP technologies could also help reduce greenhouse gas emissions because of their higher green content compared to other technologies (UNIDO 2019). Furthermore, one of the important lessons from the COVID-19 pandemic was that digitally advanced firms were more resilient in terms of mitigating the impact of the pandemic on sales, profits, and employment (UNIDO 2021).

Broad-based digital policies are necessary to promote competitiveness, sustainability, and resilience across the economy and prevent a digital divide. Such strategies should be an integral part of the overall industrial policy, aiming for inclusive and sustainable structural transformation to ensure consistency and coherence between digital policies and other policies (Foster and Azmeh 2020). At the international level, the increasing use of industrial policies by industrialized countries calls for the reassessment of the multilateral agreements on trade, investments, and industrial promotion to create more policy space for develo** countries.

3.3 Climate Change and the Need to Decarbonize Industry

According to the IPCC on Climate Change mitigation, total net anthropogenic greenhouse gas emissions continued to rise during the period 2010–2019 (IPCC 2022). While emissions declined sharply in 2020, at a rate compatible with climate change mitigation needs, this was mostly a transitory effect of the pandemic (Albaladejo et al. 2022). Still, there are signs that a global transformation is already taking place, including around industrialization. While global manufacturing activity increased by 32% between 2010 and 2020, CO2 emissions from manufacturing remained flat (IEA 2022). Moreover, beyond a narrow focus on productivity, the drive for industrialization increasingly includes environmental concerns aligned with the objectives of the 2030 Agenda. Decarbonization, resource efficiency,Footnote 7 and the circular economy are gaining relevance in the industrial sector’s policy agenda.

The green technological revolution presents a significant opportunity for develo** countries to boost productivity and achieve industrialization (Lema et al. 2020). While progressing in the green industrialization path will require a restructuring of entire industrial systems. This means industrializing differently in terms of what is produced, how it is produced, and where it is produced. It also requires new technologies that reduce environmental footprints, which makes access to these green technologies a crucial factor in the industrialization process. A recent UNIDO consultation identified that a challenge for develo** countries is to move away from being just consumers of green technologies to become producers of those technologies and associated products and to insert themselves into higher value adding segments of global value chains.

Notwithstanding these promising developments, the world is growing increasingly uneven. The adoption of green policies and investments remains concentrated in industrialized economies, while the financing, capabilities, and technologies required to undertake green industrialization continue to be out of reach for many develo** countries. The prospect of achieving carbon neutrality by 2050, in line with targets set by the Paris Agreement, will largely depend on sustainable industrial policies and practices to accelerate the industrial transformations required to address climate change (United Nations, Inter-agency Task Force on Financing for Development 2023). National policies should build domestic productive capabilities to achieve low-carbon transitions, while contributing to job creation, productivity, and economic growth.

While evidence is still emerging, some characteristics that make up effective green industrial policies include a combination of taxes and subsidies to create incentives for sustainable practices, while also placing conditionalities on public support to private companies to ensure the widespread use of environmentally friendly technologies. The implementation of carbon pricing and taxing large corporations may help internalize social costs and offset negative externalities. The establishment of road maps for different industries requires long-term planning, coordination, and proactive measures, all of which are capacities that are largely lacking in several develo** countries.

3.4 Recalibration of Global Production

There has been a long-term shift of economic activities to Asia, particularly to its East and Southeast sub-regions. The manufacturing value-added (MVA) share of Asian develo** economies in the world MVA has increased from 15 to 45% over the last 20 years and their share of the global GDP from 10 to 30% during the same period (UNIDO 2021 and 2023). China has played a major role in the shift of production gravity, increasing its global MVA share from 4% in 1990 to 30% in 2020, while the share of industrialized countries declined from almost 80% to around 50%.

The emergence of Asia as a manufacturing hub led to the reconfiguration of value chains. The proportion of the suppliers from develo** Asian countries for the 756 largest public companies globally rose from 18% in 2013 to 42% in 2019, while that share of the suppliers from industrialized countries decreased from 77 to 55% during the same period (Falk et al. 2021).Footnote 8 The greatest increase in the shares of Asian suppliers are seen in the automotive industry and industrial equipment industry, which have higher levels of technology-intensity relative to other manufacturing industries. The increase in the share of Asian suppliers in these industries has been supported by the improvement in their skills levels, as evidence by the three-fold increase in their manufacturing labor productivity over the last 30 years (Falk et al. 2021).

The COVID-19 pandemic may have accelerated the integration of Asian suppliers into supply chains of large companies. From 2019 to 2020, the share of Asian suppliers increased by an average of 2.4% points. Above-average increases were observed in the transport equipment, chemicals, and plastic and mineral products, which were mainly led by Chinese suppliers, especially in the first two industries (UNIDO 2021).

The economic rationale of the private sector was the main force behind the shift in global production during the period of globalization until the global financial crisis. The surge in Asia’s manufacturing prowess has resulted in a greater concentration of manufacturing activities in the region and the integration of more Asian firms into global value chains. However, other factors have become increasingly relevant for sha** the recent and future landscape of international production. Over the last 10 years, government policy interventions have significantly risen and have been influencing the location of international production (Juhász et al. 2023). The increasing concern over national economic security, the ongoing rivalry between the US and China, the growth of nationalism and populism, and weakening of multilateral institutions responsible for trade and investment rules have all led to a surge in protectionist measures and hoarding of crucial technologies and materials (Elia et al. 2021). In addition, environmental protection and economic sustainability in response to climate change are having an impact on the organization of manufacturing operations and supply chains.

These trends facilitated by digitalization made reshoring and nearshoring potential strategic options for reconfiguring value chains. As politics gains more significance, it is anticipated that post-pandemic reshoring policies will broaden their scope to include not just individual companies but entire value chains being brought back to their home country or region (Elia et al. 2021). The success of these reshoring or nearshoring policies will, however, depend on whether the home country can restore the manufacturing skills, infrastructure, and production networks lost during the period of de-industrialization (Vu et al. 2021).

This post-pandemic GVC reconfiguration presents both challenges and opportunities for develo** countries. The factor cost advantage of less developed countries could be eroded by political and environmental consideration and the potential for digitalization by foreign firms. At the same time, countries near major sources of foreign direct investment may benefit from nearshoring strategies if they possess the necessary manufacturing capabilities and a favorable business environment. In develo** regions, regional industrial policies and coordination have become increasingly important to maximize the advantages of the regional market, natural resources, and supply networks in order to retain and attract foreign firms.

4 Landscape of Industrial Policy in Develo** Countries

4.1 Emerging Trends and Priorities

The resurgence of industrial policy is not exclusive for the most advanced countries. On the contrary, UNIDO research shows that industrial policy is on the rise throughout develo** regions (UNIDO 2023). Equally interesting, the similarities in priorities set by policymakers around the develo** world are striking (Table 3). Two megatrends, namely digitalization and climate change, feature prominently in the industrial policy focus of many develo** regions.

Table 3 Summary of current industrial policy focus and opportunities by region
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UNIDO research has also delved into possible opportunities that develo** regions face to accelerate SDG progress through industrial policy. The opportunities identified by regions’ policymakers and experts are contingent to the specific conditions of each region. For example, Africa possesses ample potential to leverage geographic conditions for green industrialization. In Eastern Europe, policy synchronization with the EU can deliver enormous financial support to pursue industrial strategies, and in Latin America and the Caribbean, there are strong opportunities to leverage the nearshoring strategy of the US by attracting relocating firms. The ability of countries to overcome the challenges arising from on-going structural transformations and turn them into opportunities lies in their industrial policy capacities and their ability to exploit their unique regional contexts.

4.2 A Novel Agenda for Industrial Policy Capacity Building

Despite the growing interest in industrial policy in develo** countries, an open question remains regarding the availability of financial resources and government capacities to turn policies into action. While the demand for bridging funding gaps is growing,Footnote 9 still insufficient attention has been paid onto how to translate the required injection of additional resources into concrete progress. The increasingly complex environment around industrial development, and industrial policy, demands stronger government capabilities, particularly in develo** countries, which are generally unable to emulate and match the ambitious industrial policy programs deployed by highly industrialized economies.

Policymakers in develo** countries are grappling with questions of which industrial strategies they need to pursue to sustain industrialization as an engine of growth and prosperity. How to measure progress? What sector and policy areas need prioritization? What capability gaps need to be addressed to achieve intended goals?

To increase develo** country governments’ capacity to formulate and implement, and subsequently follow up and evaluate industrial policies, they need, first, to invest in skills for the use of evidence to inform policymaking. This entails strengthening the professionalization of public officials, including capabilities to access, interpret, validate, and act on emerging evidence and high levels of uncertainty. At the same time, governments need new tools and practices to assess the socioeconomic impacts that can be associated to public policy interventions.

The complexity of the issues in hand suggests the pertinence for more open, multi-stakeholder participatory policymaking processes, whereby a broader set of actors can articulate interests, formalize claims and translate them in concrete initiatives, prescribe and promote solutions, or prevent decisions from being implemented.Footnote 10 The private sector, academia, non-government organizations (NGOs), and even international organizations can contribute to policy design, implementation, adjustments, and evaluation.Footnote 11 Mazzucato et al. (2021) reiterate the fundamental role of partnerships to enable investment and innovation. They argue that given limitations on policy capacity, particularly for develo** countries, states alone will not be able to solve all challenges faced by countries, even with the best of intentions. Capability-building requires a search for complementarities and partnership across various social sectors, such as private sector, trade unions, and other civil society representations.

Running parallel to the revival of industrial policy are discussions on the role of policymaking in other complementary areas, such as trade, innovation, and competition, which will influence the prospects for fair and competitive markets, curbing monopolization, maximizing innovation, and ensuring a leveled playing field for develo** countries. Sound competition policy is essential to build strong economies and create resilient industries. By reducing entry barriers and allowing more players to participate in the market, competition policies prevent the takeover of monopolistic powers. The effective enforcement of competition policies will be essential to avoid undue preferences for national champions and market concentration. To achieve proper competition policies, develo** countries need resources and institutions to support local competition authorities, particularly in countries where state capture is prevalent.

The role of the state in partnership building would entail coordination, planning, and guiding the socioeconomic dynamics towards a sustainable economic growth pattern. Under the strong leadership of the head of the state, the government should show desirable directions, through various policy options, that would allow other socioeconomic actors to explore and exploit existing and new economic and technological potentials (Mazzucato et al. 2021). However, to ensure that these partnerships bear fruits, governments also need to establish long-term goals, create means, and enable/attract the necessary resources to put them in practice. This would imply, for example, defining ambitious goals, or “missions,” to solve societal challenges and create “value” for society, “increasing business expectations about future growth areas and catalyzing activity—self-discovery by firms—that otherwise would not happen” (Mazzucato et al. 2021, 4).

4.3 Counterbalancing Industrial Policy Measures by Advanced Countries

The ability to leverage on industrial policy differs considerably across countries depending on factors such as their level of industrialization and experience with industrial policy or their relative weight and strategic position in global affairs. Middle-income countries such as Brazil or India, for example, have been able to strike a balanced position amidst growing tensions between China and the United States. Increased political bargaining power accompanies continuous efforts to invest in different capability building programs in strategic activities and technological fields, with potentially significant industrial and economic implications (Droin et al. 2023; Jones et al. 2023). In the case of Brazil, concrete examples include critical minerals, green technologies, and a dynamic agro-processing sector (Jones et al. 2023).

The pertinence to update and upgrade the international architecture that governs critical drivers of industrialization is gaining pace in multilateral circles (United Nations, Inter-agency Task Force on Financing for Development 2023; African Group 2023a, b). Essentially, the demand is for reforms that would grant develo** countries, particularly the least developed ones, the required policy space to address local needs and constraints, while kee** the right alignment with regional and global coordination efforts toward sustainable industrial development “and other common goods” (African Group 2023b). At stake are regulations on international trade and investment, intellectual property rights and access to technology—particularly those underpinning the green and digital transition,Footnote 12 and the possibility to mobilize government aids to boost industrialization. Concrete proposals include a rebalancing of the flexibilities contained in the Agreement on Subsidies and Countervailing Measures (ASCM)—many of which had transitional periods, which have expired by now—to enable develo** countries the use of policy initiatives suitable to achieve “legitimate development goals” (African Group 2023a).Footnote 13

Insufficient policy space at the international level meets with serious fiscal constraints to adopt industrial policy initiatives, at the national level, in many develo** countries. While the nature of policy mix used in developed and develo** countries shows strong similarities, the relevance of import tariffs in develo** countries contrasts with the absence of such a policy instrument in high-income countries. Arguably, the preference for import tariffs could be explained by the fact that “unlike non-tariff measures, tariffs increase fiscal revenue and require a lower fiscal capacity” (Juhász et al. 2023, 5).

Governments in develo** countries are increasingly aware of the need to adapt and find strategies to face new global challenges. Resilience against unexpected shocks such as COVID and other events likely to be associated with climate change requires building stronger industrial sectors which, in turn, needs targeted support. A common tool used in the past for this purpose is the requirement of local content in government procurement processes. But even for this important tool, the policy space is shrinking. (African Group 2023b), for instance, decries the difficulties that develo** countries face to use local content requirements under the framework of the Agreement on Trade-Related Investment Measures (TRIMS Agreement). A revision of this restriction would be necessary to facilitate such measures as part of efforts to foster domestic manufacturing capabilities and stimulate production linkages.

5 Discussion and Conclusions

In this paper, we documented different trends which are sha** the dynamics of manufacturing development globally. Some such trends are connected to events relatively bound in time, such as the pandemic, while others are of more structural nature. The result is a mix of fast paced technological change, pressures to reorganize international trade and investment relationships, increased geopolitical tensions, and the need to balance the pursue of national interests, with enhanced collaboration and coordination to address global development challenges. It is in this complex context that industrial policy debates are gaining increased attention. In question is the role that industrial policy can play in leading social and economic prosperity, while securing resilience in an increasingly uncertain, multipolar world.

Several factors discussed in this paper will influence the ability of develo** countries to identify opportunities and tackle old and emerging challenges through more proactive industrial policies. There is a need to overcome limited financial and institutional capacities, while having to manage exposure to external shocks. At the same time, develo** countries need innovative strategies to boost industrialization, while adapting to the changes in market dynamics induced by increasingly ambitious policy actions from advanced economies.

The levels of knowledge and capacities required by develo** countries to formulate and implement industrial policies in the twenty-first century have significantly risen. Moreover, our understanding of the context around industrial development of the principles that govern global manufacturing relationships and the policy capacities required to respond to a changing landscape of industrialization needs update.

Our analysis corroborates the contextual nature of both the challenges and opportunities that result from ongoing trends around global manufacturing. The rationale for strategic policy choices largely reflects regional economic, and in particular, industrial structures, and experience with industrial policymaking. Moving forward, develo** countries need more systematic efforts to link national priorities and capacities, as well as an increased ability to mobilize different kinds of partnerships to better inform policymaking and policy implementation.

From a broad development perspective, the discussion in this paper draws from and contributes to debates around the role of industrial policy in supporting progress towards achievement of the UN development agenda (UNIDO 2020). Advocating SDG-oriented industrial policies implies embedding industrial policies as drivers of strategies for long-term prosperity. The SDGs can provide government interventions a sense of purpose and direction towards delivering win-win-win solutions, simultaneously balancing growth, environmental and social concerns (UNIDO 2016). This broad-based role of industrial policy enables for more diverse approaches to foster industrial development. For instance, mission-oriented views of industrial policy assert that because economic growth has a rate and a direction, policymakers must consider both to ensure that investments are directed at an inclusive and sustainable future, with the SDGs serving as guiding principles for defining growth’s overall direction (Mazzucato and Kattel 2023). While notions of directionality and rate have been suggested elsewhere in the context of public policy action (IATT and UNIDO 2022; United Nations Inter-Agency Task Team on Science, Technology and Innovation for the SDGs and European Commission, Joint Research Centre 2021; The STEPS Centre 2010), their practical implementation remains greenfield (Mazzucato 2018). It is neither evident nor trivial that governments in develo** countries possess the frameworks and tools that they need to become more proactive in taking on the multifaceted, long-term challenges they confront today.

Addressing the increasingly complex and uncertain environment around industrial development introduces strong demands for intensifying multilateral dialogue on strategies to ensure a level playing field. Hence, there is a better chance to balance national interests and reduce negative spillovers from national industrial policies (United Nations, Inter-agency Task Force on Financing for Development 2023). Concerted dialogue should make possible to assess and update current multilateral rules and agreements on investment, trade, and technology, which have framed the scope for industrial policy programs in develo** countries in the past. The world is changing, and the institutional setting around industrial development needs to match up.

Whether to get through crises or in the current context of trade disputes, international cooperation is essential. According to UNIDO (2021), countries alone cannot fight external shocks such as the COVID-19 pandemic. Strengthening multilateralism and coordination around industrial policies is necessary. The transnational nature of disaster risk, the multidimensional nature of resilience, and the multistakeholder approaches to disaster risk management suggest that the best strategy to cope with unexpected shocks is to pool resources across jurisdictions. Strengthening multilateralism, international coordination, and collaboration around industrial policy issues is crucial to build a better future. Improved collaboration would reaffirm commitments made around the Decade of Action to Deliver the SDGs (UNSDG 2020).

International organizations such as UNIDO should play major roles in supporting the successful implementation of industrial policies and in building industrial capabilities at different levels that countries need to make a sustained positive transformation in the pace and direction in their industrial development performances.