Governments have often sought to create globally competitive national firms, with such industrial policies having a long history. An early example is the East India Company, and Ricardo's infant industry arguments provided economic support for such efforts. More recent examples include Japan's industrial policies spearheaded by MITI, Europe's creation of Airbus to compete with Boeing, and Taiwan's successful essays through ITRI to create a world class semiconductor industry. This research project focuses on evaluating the global industry effects of solar energy Govt. industrial policies in China, Europe and the US.

A critical aspect  of solar energy is that it has not yet achieved "grid parity", that is, equivalence in the cost of  energy derived from  solar radiation  as compared to the cost of energy from other more conventional sources such as coal, oil, and gas. Solar energy is attractive to governments as a renewable resource, a way of reducing energy dependence, and as a means of combating pollution and green house gas effects ("global warming"). Hence, governments around the world have resorted to subsidies to encourage the use of solar energy and make it competitive with alternative energy sources. Such subsidies, on the demand side, encourage consumption of solar energy, while supply side subsidies seek to increase investment in solar energy manufacturing units, expecting to lower the cost of solar energy production over time, through product and process innovation, and scale economies from accumulated volume production, thus hastening the achievement of grid parity.  Demand side subsidies in Germany, Spain, Italy and the Czech Republic led to unsustainable increases in demand for solar panel modules, and generating plants, which coupled with Chinese supply side subsidies, led to large increases in global solar production capacity and accumulated output, particularly among Chinese firms. This led to a shift in global trade in solar products, with China and Taiwan accounting for about 60% of global exports in 2010, from around 10% in 2006. Europe became the single largest market and destination for Chinese exports. In the US manufacturing and trade emphasis shifted away from exporting solar panels and modules, to exporting mainly polysilicon wafers and production equipment, while importing large quantities of lower cost solar panels from China.

One consequence of the large increases in capacity and accumulated production has been a sharp decline in the cost of  solar cells and modules, with Trina Solar (one of China's main producers) forecasting $0.80/watt solar module cost by end 2012. However, Germany and Spain have withdrawn or sharply reduced consumption subsidies, leading to precipitous drops in European demand and significant overcapacity in the global industry, especially in China. As a result, spot prices for solar modules are currently about $0.94/watt, causing losses at most firms, and likely leading to shakeout and industry consolidation. This is also putting stress on alternative technology providers such as thin-film panel suppliers- e.g. First Solar, affecting their ability to compete with polysilicon-based solar panel providers.

The example of the solar energy industry has interesting lessons for policy makers, in their attempts to develop and implement industrial policies, and for corporate strategists, in their efforts to shape and take advantage of Government industrial policies to achieve global competitive advantage.