Working Paper No. 384 Vertical industrial policy: principles, practice and potential

Abstract

This report investigates the rationale, implementation challenges, and evolving global context of vertical industrial policy, with a particular focus on Sweden. Against the backdrop of recent global crises—including the 2008 financial crisis, the COVID-19 pandemic, and geopolitical disruptions following Russia’s invasion of Ukraine—the analysis explores how governments have re-evaluated the role of state intervention to bolster economic resilience and strategic autonomy. The report distinguishes between horizontal and vertical approaches, where vertical policy targets specific sectors or technologies considered critical for national development, such as green technology, semiconductors, and renewable energy. Drawing on economic theory and empirical evidence, the report outlines the key justifications for vertical industrial policy, including market failures, coordination problems, and the under-provision of public goods. It also addresses the limitations and risks associated with such policies, including information asymmetries, rent-seeking, and political capture. A central contribution is a decision-making framework designed to help policymakers assess when vertical industrial intervention may be justified and how it can be designed to minimize inefficiencies and unintended consequences. While the report takes a cautiously critical stance toward vertical industrial policy, it acknowledges its potential when implemented with clear objectives, regular evaluations, and institutional safeguards. The analysis highlights the need for a balanced and flexible approach, especially in the context of green transitions and geopolitical fragmentation.