Public risk, private reward: The distributional implications of industrial policy

The return of industrial policy to the center of US economic policy has renewed questions not only about state capacity and economic effectiveness, but also about distributional implications. Both the Biden and Trump administrations have embraced increasingly interventionist strategies to support strategic sectors, but a question remains underdiscussed: who captures the gains when publicly-supported innovation succeeds? This paper examines whether governments that assume substantial private-sector innovation risk receive returns commensurate with their contribution. Adopting a novel venture-capital perspective on public intervention with respect to previous articles published on the topic, it evaluates industrial policy not only in terms of its effects on innovation and production, but also in terms of whether the public sector (and the stakeholders it represents) captures returns proportional to the risks it assumes. To organize the analysis, the paper develops two analytical frameworks: a three-stage taxonomy of public support covering upstream research, scale-up finance, and mature demand creation and diffusion, and a four-part typology of value-capture instruments consisting of grants and subsidies, repayment, royalties, and equity participation. The analysis focuses in particular on the second stage – scale-up finance – where public intervention most closely resembles risk capital and where the choice among value-capture instruments is especially consequential. These frameworks are applied to two corporate case studies, Tesla and Moderna, both of which received significant public support and were able to create significant private value. The case comparative shows that distributional outcomes vary systematically with the stage of intervention, the instrument used, and the institutional mechanisms through which public returns are defined. To wit, Tesla illustrates a case of highly concentrated private gains with limited direct public return, whereas Moderna shows a more balanced outcome achieved alongside ex-post negotiation. The paper concludes that industrial policy is more likely to be politically durable and distributionally sustainable when value-capture instruments are matched to the form and timing of public risk-taking.