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Subsidies are making a global comeback – as a driver of innovation, but also as a source of market distortions. Studies show the limited effectiveness of government support. “Ultimately, however, it is not the quantity but the quality of subsidies that matters,” explains Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. Against this backdrop, investors need to position themselves accordingly.

Industrial policy is in vogue, and with it the central instrument of government support: subsidies. According to the OECD group of industrialised countries, industrial subsidies in 15 key sectors reached around USD 108 billion in 2024 – the highest level since the financial crisis. The trend is global: from the US and the EU to Japan, governments are spending large sums to secure technological advantages and supply security, and to reduce strategic dependencies.

According to the OECD, China is an extreme example. For years, companies in key industries there received, on average, three to eight times more government support than competitors in OECD countries; at the same time, around 60 per cent of the global market share gains made by Chinese companies can be attributed to subsidies. “But subsidies are not unique to China,” says Fischer. “The West, too, has deliberately supported its industrial development through government funding.” Japan’s rise as an industrial nation was also shaped by active industrial policy, particularly through the Ministry of International Trade and Industry and the targeted promotion of key sectors such as automobiles, steel and electronics.

The West is now catching up: the US government is providing substantial funding for research and semiconductor production through the CHIPS and Science Act, while the EU aims to mobilise more than EUR 43 billion in public and private investment through the Chips Act.

“From an economic perspective, subsidies make sense where markets fail,” explains Fischer, “for example to promote innovation, build new industries or secure strategically important value chains.” This is precisely where many current programmes are focused, for instance in semiconductors, AI and energy technologies. However, an analysis by the International Monetary Fund shows that the outcomes of past industrial policy have been rather “mixed”. While the competitiveness of products tends to improve, the effects are short-lived – and are mainly observed in sectors that were already competitive.

“The longer subsidies remain in place, the greater the risks become,” warns Fischer. Political support can lead to overcapacity, lower productivity and the misallocation of capital, rather than greater efficiency. Subsidies also fuel geopolitical conflicts: subsidy races, trade wars and greater market fragmentation are the result.

While subsidies are increasing worldwide, Germany is currently discussing the opposite approach: a blanket five per cent reduction in subsidies. “Not a good idea,” says Fischer. “With a subsidy volume of around EUR 285 billion, this risks a sweeping approach that affects sensible and inefficient programmes alike, while missing strategic priorities.” Especially at a time when other countries are expanding their industrial policies, this could become a structural risk.

What does this mean for investors? In times of national industrial support, political risks increase and regional differences become decisive. “Diversification is becoming more important,” says Fischer. The key insight is that “investors cannot prevent government intervention – but they can reduce their dependence on individual political decisions.”