Industrial Policy with Conditionalities: U.S. CHIPS & Science Act – Harvard Kennedy School
By Julia Pamilih
In the next two posts of this series, we will take a closer look at two sample cases to unpack how conditions are being used by governments to shape policy outcomes. The 2022 U.S. CHIPS & Science Act is one of the highest-profile examples of recent U.S. industrial policy – and contains several novel conditions.
The sheer size and bipartisan support for the CHIPS and Science Act made headlines. It authorizes over $52 billion for supporting the semiconductor industry, and an additional $200 billion for supporting US science and innovation. The first part of the Act lays out policies to support the primary objective of bolstering U.S. semiconductor manufacturing. It includes $52.7 billion for manufacturing and development and $24 billion of tax credits for advanced manufacturing.
Since the Act is intended to promote U.S. industry and economic security, funding comes with strict conditions. In September 2023, the U.S. Department of Commerce published its final rule on these wider guardrails. Secretary of Commerce, Gina Raimondo, explained that ‘these guardrails will help ensure companies receiving U.S. Government funds do not undermine our national security.’
This is an example of the first dimension of conditionality: type of firm behavior targeted. By using unusually strict conditions, the U.S. government set the directionality of CHIPS funding towards U.S. national security objectives. Recipients of CHIPS funds are prohibited from expanding manufacturing capacity in foreign countries of concern for ten years (this list includes China). They are also restricted from signing joint research or technology licensing efforts with foreign entities of concern. Violation of these guardrails gives the Department the right to claw back the entire federal financial assistance award.
In late February 2023, the Department of Commerce published its first Notice of Funding Opportunity (NOFO) for the CHIPS Program, setting out the details for how firms could apply for some of the $39 billion worth of manufacturing grants and subsidies. This comprehensive document sets out the detailed terms of CHIPS funding, and feature more novel use of conditions in U.S. federal funding.
In line with Mazzucato and Rodrik’s fourth dimension of conditionality, the document sets out the CHIPS program’s priorities as measurable criteria for applications. The program’s principal objective is advancing U.S. economic and national security, but the NOFO also lists other program priorities, including commercial viability, financial and technical feasibility, workforce development and broader impacts.
Under these priorities, the NOFO contains atypical provisions that use directionality to push firms to meet socially desirable policy aims. Amongst a set of workforce development conditions, applicants requesting funding over $150 million must submit a plan for affordable childcare provision for their employees. Preference is also given to applicants which commit to refrain from stock buybacks for five years.
The program also sets reinvestment and risk-reward sharing conditions, by requiring some profitable firms to share their returns with the government. Funding applicants must submit financial projections. For recipients of over $150 million of funding, there will be a mandate for “upside sharing” with the government if actual returns surpass a defined threshold. These proceeds will be used to support the U.S. semiconductor ecosystem.
Under the fixed versus negotiable/iterative conditionality dimension, many of the above conditions are fixed. But the CHIPS Program Office also advises prospective applicants to tender a statement of interest and pre-application before working with the Department of Commerce to refine their comprehensive application. This creates the opportunity for iteration.
The Act also creates an Advanced Manufacturing Tax Investment Credit for semiconductor manufacturing, worth an estimated $24 billion, which is separately administered by the IRS. Firms can apply for a 25% investment tax credit which must be used for U.S. facilities primarily engaged in semiconductor manufacturing. It is also date limited, to be used for properties initiated before January 1, 2027.
Similar manufacturing tax credits were introduced in the 2009 American Recovery and Reinvestment Act. 48C Manufacturing Tax Credits offered a 30% tax credit for investments in U.S. clean energy manufacturing facilities. Recipients had to meet certain criteria including domestic job creation, short project time and potential for innovation and commercial deployment.
The U.S. CHIPS & Science Act is part of a trend of governments adopting the innovative use of conditions, ranging from childcare provision to strict national security criteria. It is an important sample case of how governments can use industrial policy to set a strong policy direction for government funding.
This is the second post in a series on the working paper Industrial Policy with Conditionalities: A Taxonomy and Sample Cases by Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, and Dani Rodrik, Faculty Co-Director of Reimagining the Economy.
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