The Role of Government Industrial Policy
Industrial policies are usually justified as a means of preventing or compensating for market failures. Unfortunately, however, industrial policies can fail too. Industrial policy measures can be costly, and government intervention is not always successful. The Japanese government has put forward policy measures to deal with (perceived) market failures, due to economies of scale, the externalities of pollution, monopolistic conditions in international markets, infant industry situations, the public good nature of research and development and of infrastructure, economic uncertainties, and production factor price rigidities. Some market failures are particularly likely to occur at certain stages of a nation's economic development. For example, in the early phase of economic development, when only limited amounts of scientific and technical information are available as a public good for the use of R&D, underinvestment in research and development may be particularly likely.
The success of industrial policies discussed in this chapter depends in large measure on stable macroeconomic conditions that encourage firms to undertake forward-looking capital investments. Industrial policies such as these cannot succeed in isolation of successful macroeconomic policies.
There is a Japanese government ministry that is responsible for developing policy measures for each major sector of the economy. For example, the