98. Third, innovation, which underlies the industrial upgrading and diversification process, is by nature a very risky endeavor. Even when governments are willing and capable of helping by facilitating coordination and information sharing among firms, success is not guaranteed. Firms can fail in their attempt to upgrade their activities in new industries because the targeted industry may be too ambitious, or the market too small, or the coordination inadequate. But even such cases of failure offer useful information to other firms: failures indicate that the targeted industries are inappropriate and should be re-examined or demonstrate the lack of appropriate incentives or government facilitation more generally. Therefore, firms that are first-movers pay the cost of failure and produce valuable information for other firms. When the first movers succeed, their experience also provides information externalities to other firms: their success proves that the new industry aligns with the economy‘s comparative advantage.

_Industrial policy and growth identification and facilitation_ 99. There is considerable historical evidence that today‘s most advanced economies have relied heavily on precisely these types of government interventions to ignite and facilitate their economic take-off, which allowed them to build strong industrial bases and sustain their growth momentum over long periods. In his well-known survey of trade and industrial policies that led to early economic transformations in the Western world, List (1841) documented various policy instruments through which governments protected domestic industries or even intervened to support the development of specific industries, many of which became successful and provided the bedrock for national industrial development.

100. Chang (2003) reviewed economic developments during the period when most of the present day advanced economies went through their industrial revolutions (between the end of the Napoleonic wars in 1815 and the beginning of World War I in 1914). Contrary to conventional wisdom that often attributes the industrial successes of Western economies to laissez-faire and free-market policies, the historical evidence shows that the use of industrial, trade, and technology policies were critical to their successful structural transformation. The interventions ranged from the frequent use of import duties or even import bans to protect infant industries, to industrial promotion through monopoly grants and cheap supplies from government factories, to public-private partnerships and direct state investment, especially in Britain and the U.S., in addition to various other subsidies (Trebilcok 1981).

101. The U.S. government has constantly offered strong incentives to private businesses and academic institutions to discover new ideas that may be valuable for sustaining growth and has encouraged making such ideas non-rival—in addition to building infrastructure in key economic sectors such as transportation and providing financing to education and training in order to build the country‘s skills base in many industries. Chang (2003) observes that interventions by the U.S. government have included support to industries such as computers, aerospace, and the internet, where the U.S. still maintains an international edge despite the decline in its overall technological leadership. He notes that these industries would not have existed without defenserelated R&D funding by the U.S. government.

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