Two typical instruments used by governments in industrial policy.

Two typical instruments used by governments in industrial policy.

• A. Targeted subsidies and tax incentives for firms; creation of SEZ or investment in infrastructure.
• B. Broad tax increases on all sectors.
• C. Free market deregulation only.
• D. Nationalization of all industries.

Answer: (A)

Industrial policy shaping often relies on selective support to steer investment and growth toward strategic sectors or regions. Targeted subsidies and tax incentives for firms directly lower the costs or risks of investing, encouraging new plants, expansions, or research and development in priority areas. Creating Special Economic Zones and investing in infrastructure reduces barriers, lowers logistics costs, and improves location advantages, making it more attractive for firms to locate, expand, or upgrade capabilities. Together, these tools actively influence where and how industry grows, rather than applying broad, uniform measures.

Broad tax increases across all sectors are more about raising revenue than directing development, so they don’t serve as targeted industrial policy instruments. Free market deregulation reduces government involvement and isn’t itself an active instrument to promote specific industries. Nationalizing all industries is an extreme, impractical approach and not representative of how governments typically pursue industrial development.