Targeting Industrial Policy on Business Services: Rationales and Design for the Case of Chile

Abstract

This article explores whether and how targeting industrial policy towards business services (BS) may contribute to economic development in Chile. To do so, the literature on rationales for targeted industrial policy and the relation between BS and economic development is reviewed. I stress that BS potential in economic development depends on productive linkages and associated capacity for generating knowledge and technological spillovers. Then, drawing on Chilean input-output tables for the years 1996 and 2016, an empirical assessment of productive linkages in the tradition of Hirschman is conducted. Three findings stand out from this exercise. First, BS exhibit relatively strong forward linkages and weak backward linkages, thus the sector is generally dependent on intermediate demand. Second, although the magnitude of its forward linkages have decreased, the relative importance of the sector within the domestic economy has increased over the period under study. It is argued that this result is counter-intuitive and affects the capacity of BS to contribute to a beneficial pathway of structural change in the Chilean economy. Third, when breaking down BS into subsectors, the linkages reveal important heterogeneity within the sector. It is suggested that this is relevant for discussing what industrial policy should target within BS. Moving forward, considerations for policy design are put forth. Focusing on rationales for intervention and other policy design aspects, the recent experience of industrial policy towards BS in Chile is analysed. Lastly, policy implications associated with the preceding discussion are further illustrated by drawing on the case of offshore services in Costa Rica. By bringing together these elements, the article's main contribution points to the role that productive linkages play in generating beneficial dynamics of economic development associated with BS.