Introduction

The starting point for this chapter is to consider what is meant by ‘industrial policy’ and what might be its rationale. The traditional notion was that government should intervene to promote manufacturing as a whole or key industrial sectors to widen the country's industrial base and to increase the rate of growth of manufacturing output and productivity. These objectives could be pursued through subsidies or tax breaks to investment, encouragement of mergers that created ‘national champion’ firms, state ownership and protectionist policies. In this guise, ‘industrial policy’ reached its apogee in the 1970s.

Economists might see a rationale for such interventionist policies in terms of seeking to correct market failures. For example, while free trade and specialisation along lines of comparative advantage represent an effcient allocation of today's economic resources, it may imply neglecting infant industries with high productivity growth potential and positive externalities in the future. Advocates of traditional industrial policies would frequently argue that they were needed to counter the ‘shorttermism’ of British capital markets. And a more radical approach might have entailed the creation of new financial institutions or more direct state control of investment decisions.

By the mid–1990s, government policy was focused on ‘competitiveness’. This was defined in terms of ‘the degree to which it can, under free and fair market conditions, produce goods which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term’.