In industrial policy, the government takes measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation".
Prominent early arguments in favor of selective protection of industries were contained in the 1791 Report on the Subject of Manufactures[12] of US statesman Alexander Hamilton,[13] as well as the work of German economist Friedrich List.
"[17][neutrality is disputed] In the US, an industrial policy was explicitly presented for the first time by the Jimmy Carter administration in August 1980, but it was subsequently dismantled with the election of Ronald Reagan the following year.
[19] These early examples are followed by interventionist ISI strategies pursued in Latin American countries such as Brazil, Mexico or Argentina.
[20] The success of these state-directed industrialization strategies are often attributed to developmental states and strong bureaucracies such as the Japanese MITI.
[23] Many of these domestic policy choices, however, are now seen as detrimental to free trade and are hence limited by various international agreements such as WTO TRIMs or TRIPS.
Instead, the recent focus for industrial policy has shifted towards the promotion of local business clusters and the integration into global value chains.
A key objective of Socrates was to utilize advanced technology to enable US private institutions and public agencies to cooperate in the development and execution of competitive strategies without violating existing laws or compromising the spirit of "free market".
Even though market mechanisms have gained importance, state guidance through state-directed investment and indicative planning plays a substantial role in the economy.
Governments, in making decisions with regard to electoral or personal incentives, can be captured by vested interests, leading to industrial policies supporting local rent-seeking political elites while distorting the efficient allocation of resources by market forces.
For example, economists debate whether developing countries should focus on their comparative advantage by promoting mostly resource- and labor-intensive products and services, or invest in higher-productivity industries, which may only become competitive in the longer term.
[36] Some argue that the lower the government accountability and capabilities, the higher the risk of political capture of industrial policies, which may be economically more harmful than existing market failures.