This volume critically evaluates current proposals to target industries with trade and industrial policies. It begins by explaining why proponents' arguments make sense only in theory-giving them a superficial appeal-and why in practice targeting has led to a string of costly failures. Proponents argue that governments could bolster their firms' international competitive position through subsidies to raise profits, enter new markets, invest in research, and preserve domestic employment. Careful examination shows that targeting has failed to meet any of these goals in the past because private markets have outsmarted government bureaucrats as firms, investors, and consumers have found ways to circumvent the distorting effects of government intervention in a competitive world market. Furthermore, contrary to popular wisdom, targeting's track record has been equally disappointing in Japan and South Korea, two countries that are frequently cited as examples of industrial policy successes. The growth of these economies stems more from entrepreneurial saving and investment than from government policy directives.
The second half of this volume reviews the performance of targeting in the semiconductor industry. Policy activists have claimed that the semiconductor industry is the exception to the rule that targeting does not work and that aggressive trade and industrial policies have actually boosted national incomes and employment in the industry. This analysis carefully evaluates the rationales offered for targeting the semiconductor industry and explores the question of whether any of those rationales have been justified in practice. It finds that targeting is just as unimpressive in semiconductors as in other sectors. The industry is littered with policies whose actual consequences were quite different-and typically much costlier-than targeting proponents promised.