How Developing Countries Use Commercial Policy: Export Promotion, Industrialization, and Foreign Investment

Developing countries face a central economic challenge: how to grow faster, create better jobs, and move from low-value activities into more productive industries. One of the main tools governments use to shape this process is commercial policy—the set of rules and incentives that influence trade, production, and investment.

In practice, commercial policy in developing countries usually focuses on three closely connected strategies:

1. export promotion,

2. industrialization, and

3. attraction of foreign investment.

These strategies are not separate. When designed well, they reinforce one another and help countries integrate into the global economy while strengthening domestic industries.

The role of the global trade system

Most developing countries now design their commercial policies within the framework of the global trading system, especially under the rules of the World Trade Organization. These rules limit extreme forms of protectionism but still leave space for industrial support, export incentives, and investment promotion.

At the same time, policy advice and financing from institutions such as the World Bank and the United Nations Conference on Trade and Development have strongly influenced how developing countries design their commercial strategies.

Within this environment, export promotion, industrialization, and foreign direct investment have become the core pillars.

Export promotion: moving beyond raw materials

Export promotion refers to policies aimed at increasing both the volume and the sophistication of a country’s exports. Many developing countries begin with exports dominated by agricultural products, minerals, or basic manufactures. The challenge is not only to export more, but to export better.

Typical export-promotion tools include:

• tax rebates or duty drawbacks for exporters,

• export-processing zones and special economic zones,

• simplified customs procedures,

• export credit and insurance schemes, and

• government support for marketing, certification, and logistics.

The economic logic is simple: international markets are highly competitive, and domestic firms in developing countries often face higher costs, weaker infrastructure, and limited access to finance. Temporary and targeted support helps firms reach foreign markets, learn from global buyers, and upgrade their production standards.

Export promotion also allows countries to benefit from scale. Domestic markets are often too small to sustain large, efficient factories. Access to international demand makes modern manufacturing viable and creates strong pressure to improve productivity.

However, export promotion works best when it is disciplined. If incentives are permanent and unconditional, firms may become dependent on subsidies instead of becoming competitive. Successful countries tie export support to clear performance targets.

Industrialization: building domestic productive capacity

Export promotion alone is not enough. Developing countries also pursue industrialization—the deliberate expansion of manufacturing and modern services.

Historically, many countries followed import-substituting industrialization, protecting domestic industries from foreign competition. One of the most influential advocates of this approach was Raúl Prebisch, who argued that developing countries suffered from long-term disadvantages in global trade and needed protection to build local industry.

Modern industrial policy looks different. Instead of broad and permanent protection, governments increasingly focus on:

• targeted support for selected sectors,

• technology upgrading and worker training,

• infrastructure development in industrial clusters, and

• coordination between public institutions and private firms.

The goal is not to replace imports at any cost, but to develop competitive domestic industries that can participate in regional and global value chains.

Industrialization policies often prioritize sectors that generate learning spillovers—such as electronics, machinery, automotive parts, pharmaceuticals, and digital services. Governments justify intervention by pointing to market failures: private firms may underinvest in skills, technology, and innovation because the benefits cannot be fully captured by individual companies.

Yet industrial policy is also risky. Governments may choose the wrong sectors or support politically connected firms rather than productive ones. This is why transparency, sunset clauses, and regular performance evaluations are increasingly considered essential parts of modern industrial policy.

Foreign investment: importing capital, technology, and know-how

The third pillar of commercial policy is the attraction of foreign direct investment (FDI). Foreign investors bring not only capital, but also advanced technology, management practices, global distribution networks, and quality standards.

Most developing countries use a mix of:

• investment promotion agencies,

• tax holidays or reduced corporate tax rates,

• fast-track licensing and one-stop shops, and

• legal protections for investors.

FDI plays a particularly important role in connecting domestic firms to global production networks. Multinational corporations often rely on local suppliers for components, logistics, and services. When linkages are strong, domestic firms can learn from foreign partners and gradually move into higher-value activities.

However, foreign investment does not automatically generate broad development benefits. If foreign firms operate in isolated enclaves, import most inputs, and repatriate most profits, the local economy gains little. For this reason, many developing countries combine FDI promotion with policies that encourage:

• local sourcing,

• joint ventures,

• training of local workers, and

• technology cooperation with domestic firms.

How the three strategies reinforce each other

Export promotion, industrialization, and foreign investment are most effective when they are aligned.

Export-oriented industrial policy pushes domestic firms to compete globally rather than survive behind high tariff walls. At the same time, foreign investors can act as anchors for export growth by integrating the host country into their international supply chains. Industrial policy then helps domestic firms absorb new technologies and meet international standards.

In other words:

• export promotion creates market access and competitive pressure,

• industrialization builds domestic productive capabilities, and

• foreign investment accelerates learning and technological upgrading.

Country experiences

Several developing and formerly developing economies illustrate how these strategies can work in practice.

• South Korea used aggressive export promotion combined with strong industrial policy to build globally competitive firms in steel, electronics, and shipbuilding. Government support was closely linked to export performance, and underperforming firms often lost privileges.

• China combined large-scale attraction of foreign investment with active industrial upgrading policies. Special economic zones were used to attract multinational firms, while domestic companies gradually moved into more advanced manufacturing and technology sectors.

• Vietnam has relied heavily on export-oriented FDI in electronics, garments, and machinery, while simultaneously reforming domestic institutions to support industrial clusters and supplier development.

• Mexico integrated deeply into North American production networks through trade liberalization and FDI attraction, especially in automotive and electronics manufacturing.

These cases show that different institutional and political systems can adopt similar commercial policy tools, but outcomes depend on implementation quality, coordination, and long-term commitment.

Ongoing challenges

Despite their popularity, these strategies face several important challenges.

First, global competition has intensified. Many developing countries now pursue similar export-oriented manufacturing strategies, especially in electronics, garments, and automotive parts. This makes it harder to gain market share and sustain high growth rates.

Second, technological change—automation, digital platforms, and artificial intelligence—reduces the advantage of low-cost labor in some industries. Developing countries must therefore place greater emphasis on skills, innovation, and services linked to manufacturing.

Third, international trade rules limit certain types of subsidies and performance requirements. Governments must design commercial policies that comply with international commitments while still supporting domestic development goals.

Finally, environmental sustainability has become a central concern. Industrialization and export growth must increasingly align with climate goals, clean energy strategies, and resource efficiency.

Conclusion

Commercial policy remains a powerful development tool for low- and middle-income countries. Export promotion helps firms reach global markets and build scale. Industrialization policies strengthen domestic productive capacity and encourage technological upgrading. Foreign investment accelerates learning and integration into global value chains.

The most successful developing countries do not rely on one of these approaches alone. Instead, they combine all three in a coordinated strategy—supporting exporters, nurturing domestic industry, and attracting foreign investors while demanding performance and encouraging local linkages.

The core lesson is not that governments should control markets, but that smart, disciplined, and adaptive commercial policy can shape how countries participate in the global economy—and determine whether trade becomes a driver of long-term development or a missed opportunity.