Industrial policy in the context of "Import-substitution-industrialization"

The People's Republic of China has a developing mixed socialist market economy, incorporating industrial policies and strategic five-year plans. China has the world's second-largest economy by nominal GDP and since 2016 has been the world's largest economy when measured by purchasing power parity (PPP). China accounted for 19% of the global economy in 2022 in PPP terms, and around 18% in nominal terms in 2022. The economy consists of state-owned enterprises (SOEs) and mixed-ownership enterprises, as well as a large domestic private sector which contribute approximately 60% of the GDP, 80% of urban employment and 90% of new jobs.

China is the world's largest manufacturing industrial economy and exporter of goods. China is widely regarded as the "powerhouse of manufacturing", "the factory of the world" and the world's "manufacturing superpower". Its production exceeds that of the nine next largest manufacturers combined. However, exports as a percentage of GDP have steadily dropped to just around 20%, reflecting its decreasing importance to the Chinese economy. Nevertheless, it remains the largest trading nation in the world and plays a prominent role in international trade. Manufacturing has been transitioning toward high-tech industries such as electric vehicles, renewable energy, telecommunications and IT equipment, and services has also grown as a percentage of GDP. However, recent research indicates that China’s Total factor productivity (TFP) growth has slowed significantly. IMF estimates show that TFP growth declined from approximately 3.7% in the 2000s to around 1.9% during 2010–2019. Structural reforms and technological progress in manufacturing between 2010 and 2020 contributed only modestly to productivity gains. Additionally, a 2024–2025 IMF working paper finds that factor misallocation resulting from industrial and regulatory policies implemented since the early 2010s reduces China’s aggregate TFP by roughly 1.2% annually. IMF research suggests that while China’s state-led push for high-tech self-reliance since 2013 has supported rapid innovation, it has been accompanied by efficiency losses. Policy measures, including targeted state subsidies appear to favor politically connected firms, crowd out competition, and lead to overcapacity, undermining overall productivity. China is the world's largest high technology exporter. As of 2023, the country spends around 2.6% of GDP to advance research and development across various sectors of the economy. It is also the world's second-largest importer of goods. China is a net importer of services products.

A market economy is an economic system in which the decisions regarding investment, production, and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.

Market economies range from minimally regulated to highly regulated systems. On the least regulated side, free market and laissez-faire systems are where state activity is restricted to providing public goods and services and safeguarding private ownership, while interventionist economies are where the government plays an active role in correcting market failures and promoting social welfare. State-directed or dirigist economies are those where the state plays a directive role in guiding the overall development of the market through industrial policies or indicative planning—which guides yet does not substitute the market for economic planning—a form sometimes referred to as a mixed economy.

Green industrial policy (GIP) is strategic government policy that attempts to accelerate the development and growth of green industries to transition towards a low-carbon economy. Green industrial policy is necessary because green industries such as renewable energy and low-carbon public transportation infrastructure face high costs and many risks in terms of the market economy. Therefore, they need support from the public sector in the form of industrial policy until they become commercially viable. Natural scientists warn that immediate action must occur to lower greenhouse gas emissions and mitigate the effects of climate change. Social scientists argue that the mitigation of climate change requires state intervention and governance reform. Thus, governments use GIP to address the economic, political, and environmental issues of climate change. GIP is conducive to sustainable economic, institutional, and technological transformation. It goes beyond the free market economic structure to address market failures and commitment problems that hinder sustainable investment. Effective GIP builds political support for carbon regulation, which is necessary to transition towards a low-carbon economy. Several governments use different types of GIP that lead to various outcomes. The Green Industry plays a pivotal role in creating a sustainable and environmentally responsible future; By prioritizing resource efficiency, renewable energy, and eco-friendly practices, this industry significantly benefits society and the planet at large.

GIP and industrial policy are similar, although GIP has unique challenges and goals. GIP faces the particular challenge of reconciling economic and environmental issues. It deals with a high degree of uncertainty about green investment profitability. Furthermore, it addresses the reluctance of industry to invest in green development, and it helps current governments influence future climate policy.

Local purchasing is a preference to buy locally produced goods and services rather than those produced farther away. It is very often abbreviated as a positive goal, "buy local" or "buy locally', that parallels the phrase "think globally, act locally", common in green politics.

On the national level, the equivalent of local purchasing is import substitution, the deliberate industrial policy or agricultural policy of replacing goods or services produced on the far side of a national border with those produced on the near side, i.e., in the same country or trade bloc.