Governments increasingly use protection and targeted subsidies to promote domestic firms. These policies are usually evaluated in the market they target. This column uses India’s 4G rollout to show why that can be misleading when products and infrastructure are complements. Restricting low-priced Chinese phones slowed 4G network expansion and did not raise Indian phone firms’ profits, while a subsidy open to all 4G phones accelerated coverage more than a domestic-only subsidy.
Industrial policy has moved back to the centre of economic policy. Governments increasingly use tariffs, domestic-content rules, and targeted subsidies to support strategic sectors. Recent VoxEU discussions emphasise both the potential role of such policies and the costs that can arise when trade restrictions raise input costs or reduce access to foreign technology (Juhasz et al. 2023, Goldberg and Ruta 2025, Gerarden et al. 2026).
A central question in this debate is whether policies that restrict foreign firms help domestic firms. The usual way to think about this question is within the market being protected. Restricting foreign cell phones, for example, reduces competition faced by domestic phone makers. But this view can be incomplete when the protected market is linked to another market. If the availability of phones affects firms’ incentives to build wireless networks, a policy aimed at phone makers can also change investment by mobile carriers. That change can then feed back into the phone market.
In our recent paper (Chatterjee et al. 2026), we study these forces during India’s transition to 4G. The setting allows us to ask a broader industrial policy question: can protecting domestic firms in one market slow technology adoption in a complementary market, and can this effect be large enough to leave the protected firms themselves worse off?
India’s mobile industry provides a useful setting because consumers typically buy a cell phone and wireless service separately. A 4G phone can operate on an older network, but consumers obtain much more value from it when 4G service is available. Similarly, a carrier’s investment in a 4G network is more valuable when many consumers have access to 4G phones. The two markets therefore reinforce one another.
We combine data on cell phone prices, characteristics, and sales with data on wireless carriers’ prices, subscribers, and regional network coverage from 2011 to 2018. International firms were important in the phone market, accounting for 72% of 3G and 4G phone sales in our sample. They also introduced 4G phones earlier. Indian firms entered the 4G segment later and were concentrated at the low end of the market. At the same time, 4G network coverage expanded first in higher-income regions and then in lower-income regions. Figure 1 shows these two developments occurring together.
Figure 1 4G network expansion and 4G phone sales in India
The segmentation of the phone market is particularly important for the policy question. Indian firms accounted for 59% of 4G phone sales in the lowest price tercile, but only 5% in the middle tercile and 1% in the highest. This makes protection of the low-end segment look attractive if the phone market is considered on its own. Yet the timing points to another possibility. International firms began selling 4G phones in 2013, as 4G coverage was starting to expand; Indian 4G sales rose later, after coverage had become much broader. By 2016Q3, 4G service had reached all 22 telecommunications regions. These patterns provide suggestive evidence of feedback between the two markets.
To study how these spillovers shape technology diffusion, we build a model in which consumers choose a phone and a wireless plan, phone firms choose which products to offer and their prices, and carriers decide when to introduce 4G service in different regions. The purpose of the model is to trace the effects of a policy change through both markets. A change in phone availability alters the profitability of network expansion; the new network coverage then changes phone firms’ incentives to offer 4G products.
Our estimates provide suggestive evidence for this mechanism. Consumers value a 4G phone substantially more when it is paired with a 4G network. International firms have higher markups on 4G phones, consistent with an advantage in 4G phone offerings, while Indian firms have a cost advantage in lower-quality phones. Taken together, these findings point to the economic forces highlighted above: the early availability of international 4G phones can strengthen carriers’ incentives to expand 4G coverage, while wider coverage can make it profitable for Indian firms to introduce lower-priced 4G phones.
We first consider a policy that was debated in India: preventing Chinese firms from selling phones priced below 12,000 INR. This would have been a substantial restriction. In 2018Q2, 70% of Chinese phones were priced below this threshold. We simulate what would have happened if such a restriction had applied from the beginning of the 4G transition.
The direct effect is predictable: the number of available 4G phones falls. The indirect effect is more important for our question. With fewer affordable 4G phones, carriers have weaker incentives to expand 4G networks. Under the ban, it takes roughly five quarters longer to reach the same number of regions with 4G coverage. Consumer surplus falls by about 236 billion INR per quarter on average. For comparison, average total revenue in these two markets is about 605 billion INR per quarter. The discounted value of carriers falls by about 181 billion INR.
Indian phone firms face two opposing forces. They benefit from less direct competition from Chinese firms, but they lose from the slower expansion of the complementary 4G network. In our simulations, the second effect dominates. Indian firms introduce some additional 4G phones in later periods, but their profits do not rise overall. The policy therefore lowers consumer welfare without delivering the intended gain to domestic phone makers.
Figure 2 Effects of a ban on budget Chinese phones
Our second exercise compares two subsidies with the same rate, equal to 20% of a 4G phone’s price. Under an unrestricted subsidy, every 4G phone is eligible. Under a domestic-only subsidy, only Indian 4G phones receive support. The comparison isolates how the scope of eligibility changes the feedback between phone adoption and network expansion.
Both policies expand the 4G phone market, but the unrestricted subsidy does much more. It raises the average number of 4G phone models by 54% and 4G phone sales by 64%, compared with 20% and 24% under the domestic-only subsidy. This difference spills into the wireless market. The unrestricted subsidy speeds urban 4G expansion by up to four quarters and rural expansion by roughly two quarters. The domestic-only subsidy advances urban coverage by about one quarter and has almost no effect on rural coverage.
The welfare differences are also large. The unrestricted subsidy increases consumer surplus by about 390 billion INR per quarter, compared with 110 billion INR under the domestic-only subsidy. Average government spending is 33.3 billion INR per quarter under the unrestricted policy and 5.6 billion INR under the domestic-only policy. Most notably, Indian phone firms themselves earn higher profits under the unrestricted subsidy. Although the domestic-only policy gives Indian firms exclusive eligibility, it generates less 4G adoption and therefore a weaker response from carriers.
Figure 3 Effects of unrestricted and domestic-only 4G phone subsidies
These results do not imply that protection is always undesirable, or that subsidies should always be open to foreign firms. The point is that the relevant market boundary can be wider than the market directly targeted by the policy. In India’s 4G transition, restricting foreign phone firms changes carriers’ network investment, and that investment response feeds back to the domestic firms the policy is intended to help. Looking only at competition among phone makers misses this channel.
The same issue can arise in other industries built around complementary products and infrastructure, including electric vehicles and charging stations (Springel 2021), hardware and software, and renewable generation and the electricity grid. This is especially relevant in developing countries, where technologically advanced firms are often foreign. Industrial policy in these settings should be evaluated by tracing how firms adjust investment and product offerings across all connected markets. A policy that looks protective in one market can be counterproductive once those responses are taken into account.
This perspective complements recent work showing that industrial policies can affect technology adoption and innovation through channels beyond their direct effects on targeted producers (Barwick et al. 2024, Gerarden et al. 2026). In markets with strong complementarities, policy design matters because the scope of eligibility can change the incentives of firms in complementary markets.
Source : VOXeu
Commodity booms are easy to celebrate but hard to manage. For resource-rich economies, commodity windfalls—if…
Official Russian statistics report a mild recession in 2022 following the full-scale of Ukraine but…
Aggregate productivity growth in Europe has disappointed over the last two decades, fuelling concerns about…
Housing shortages and rising rents have become a source of political pressure in many countries,…
The labour force participation rate in the euro area has risen in recent years while…
Imitation is a first-order concern for enterprises operating global production processes. Firms routinely source knowledge-intensive…