Trade policy and industrialisation when backward and forward linkages matter

• Goods and sectors are linked by shared parts.
• Policy towards one sector shapes outcomes in others.
• Linkages amplify the effects of policy.
• Targetting matters for effective policy.

This paper develops a model in which the interaction of forward and backward linkages determines the range of goods and of parts that are produced in a developing economy. Using a simple formalisation of the range and sophistication of parts used in different goods, the paper investigates the effects of trade and industrial policy. Linkages create multiplier effects, so, for example, support for final goods producers can increase the range of parts produced, broadening the industrial base and attracting entry of further final goods producers. Effects depend on whether policy is targeted at appropriate margins. Policies that expand the range of parts on the margin are likely to spark more industrialisation than policies that promote parts production within the margin (parts that are already produced domestically), or parts far beyond the margin (highly sophisticated parts not used in locally produced final goods).