Author: Olena Snihova, Doctor of Economics, Senior Research Fellow at the State Institution “Institute of Economics and Forecasting of the National Academy of Sciences of Ukraine”

Industrial policy is undergoing a transformation worldwide. Contemporary challenges to economic development – ranging from the ‘dual transition’ to geo-economic fragmentation – are leading academics and practitioners to recognise that it is impossible to resolve structural problems, overcome the economic stagnation of certain regions or ensure countries’ economic security through classical market mechanisms alone. This is forcing governments to move away from relying on the liberal model of market self-regulation in favour of implementing the principles of strategic planning, under which the main trend and fundamental direction of industrial development is its clear territorial specificity. This ground-level approach to industrial strategies, anchored in specific regions and communities, signals a paradigm shift in the approach to industrial development, whereby national industrial strategies are adapted to the actual needs and capabilities of a specific territory and require a systematic link with regional policy.

Why is regional policy becoming critically important for industrial development?

Local ecosystems rather than abstract markets. Contemporary industrial policy in the world’s industrialised nations (in particular, the US and the EU) no longer focuses solely on abstract support for economic sectors, but is shifting its focus to specific regions and communities. Success in implementing national strategies is now linked to the development of local industrial ecosystems. According to the OECD, subnational authorities (municipalities and regions) are responsible for almost 60% of all public investment and implement national industrial development plans at the local level.

Cooperation rather than destructive competition. Modern regional policy rejects mutually destructive competition between territories for limited resources and human capital. It aims to overcome the tendency to focus solely on own economic interests – a tendency that weakens the system as a whole – and offers tools for inter-regional synergy to generate new added value. The emphasis is on complementarity and cooperation. In particular, within the EU, “smart” specialisation strategies encourage each region to develop its unique strengths by integrating into pan-European value chains, so that together they can overcome any “technological traps”.

National competitiveness through the elimination of regional imbalances. Levelling regional development and ensuring national competitiveness are two sides of the same coin. Investing in economically weaker regions is not about passive subsidy schemes, but about stimulating the realisation of these regions’ hidden socio-economic potential. By developing industry in the regions, states contribute to reducing economic imbalances and structural problems – ranging from excessive pressure on the infrastructure of large cities to high local social expenditure. Addressing these issues levels the playing field for business, optimises the use of a region’s resource potential, and enhances the country’s overall investment appeal in global markets.

New rules of the game. The current reconfiguration of the global landscape demonstrates the clear priority of economic security over the liberal principles of economic development. Instead of global value chains, states are opting for localisation measures. The desire of countries to ensure the resilience of supply chains and create jobs through localisation requirements indicates that retaining production, technology, and jobs in specific territories is becoming a more significant factor in development than openness to global markets.

Is modern regional policy ready to become a driver of new industrialisation? The answer to this question is positive, as modern industrial development is underpinned by policies tied to specific territories. The countries that will prevail are those that provide sub-national authorities with incentives and resources to develop the unique comparative advantages of their territories.