What if Capacity Building Starts in the Middle? Lessons from Nations with Industrial Memory

Posts on startup-centric sovereign tech ecosystems (e.g., LinkedIn taglines) repeatedly endorse a bottoms-up approach. A Revolution! Yay! I often quip that if you want to do a “middle-out” revolution as an employee, you better be prepared to die on that hill…

But we have seen “middle-out” transformations of industrial policies, such as Japan’s Ministry of Economy, Trade and Industry (METI), India’s public-private Micro, Small, and Medium Enterprises (MSME) infrastructure, and Israel’s Ministry of Defense (MOD) industrial base. Why did it work there?

All three examples (Japan, India, Israel) have better Infrastructure Memory: The institutional, technical, and cultural capacity to design, produce, evolve, and sustain complex systems over time — even across generations, crises, or wars.

Japan: Ministry of Economy, Trade and Industry (METI)

Post-World War II, Japan faced the monumental task of rebuilding its economy. The government established the Ministry of International Trade and Industry (MITI) in 1949, which later evolved into METI in 2001. MITI played a pivotal role in orchestrating Japan’s rapid industrialization, focusing on sectors like steel, shipbuilding, and electronics.

Key Initiatives:

• Industrial Policy: MITI implemented strategic industrial policies, including subsidies, tax incentives, and import restrictions, to nurture domestic industries.
• Technology Development: The ministry promoted R&D through collaborations between government, industry, and academia, leading to innovations in various sectors.
• Export Promotion: MITI facilitated export-oriented growth by supporting Japanese companies in accessing global markets.

Impact: These coordinated efforts propelled Japan to become a global industrial powerhouse by the 1980s. However, challenges emerged in the 1990s due to economic stagnation and increased global competition, prompting METI to adapt its strategies towards innovation and deregulation.

India: Public-Private MSME Infrastructure

India’s MSME sector has been integral to its economy, contributing significantly to employment and GDP. Recognizing this, the government has implemented various policies to support and develop this sector.

Key Initiatives:

• Policy Support: The MSME Development Act of 2006 provided a comprehensive framework for the promotion and development of MSMEs.
• Financial Assistance: Schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) offer collateral-free credit to MSMEs.
• Technology Upgradation: Programs such as the Technology Upgradation Fund Scheme (TUFS) aim to modernize MSMEs by facilitating access to advanced technologies.
• Infrastructure Development: The establishment of MSME clusters and industrial parks provides shared facilities and services to enhance competitiveness.

Impact: These initiatives have bolstered the MSME sector, making it a vital component of India’s economic growth and a significant contributor to exports and employment.

Israel: Ministry of Defense (MOD) Industrial Base

Historical Context:
Israel’s defense industry has its roots in the pre-state era, with clandestine arms manufacturing to support the Jewish community’s defense needs. Post-independence, the MOD prioritized the development of a self-reliant defense industry.

Key Initiatives:

• State-Owned Enterprises: Establishments like Israel Aerospace Industries (IAI) and Rafael Advanced Defense Systems have been central to defense R&D and production.
• Innovation and R&D: The MOD invests heavily in cutting-edge technologies, fostering a culture of innovation that extends to the civilian sector.
• Export Promotion: Israel has become a significant exporter of defense equipment, leveraging its advanced technologies and combat-proven systems.

Impact: The defense industry’s emphasis on innovation has not only ensured national security but also spurred the growth of Israel’s high-tech sector, contributing to its reputation as the “Startup Nation.”

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Where did the U.S. Choose a Different Path?

Japan, Israel, and India use explicit industrial policies — state-led strategies that coordinate capital, regulation, and R&D in line with national goals. The U.S. historically defaults to market mechanisms, relying on the private sector to allocate capital and select winners, with the government mostly intervening through procurement (e.g. DoD, DOE, NASA).

Israel and Japan build national industrial champions — state-backed entities like Rafael, IAI, or Hitachi that anchor ecosystems and accumulate capability over decades. The U.S. operates a procurement-led model: government agencies define needs, then outsource execution to primes or commercial players (e.g. Raytheon, Lockheed, Anduril). As a result, the U.S. innovation is often mission-fragmented: the DoD funds capabilities, not firms. There is rarely a throughline from invention to domestic manufacturing to export strategy.

Israel’s defense innovations often transfer directly to commercial tech (e.g. drones, cybersecurity, edge AI). The U.S. dual-use potential is high but undercoordinated: bureaucratic, export-controlled, and often blocked by acquisition rules (e.g. FAR/DFARS). The U.S. underperforms on conversion efficiency (i.e. turning military R&D into resilient commercial advantage) compared to smaller, more integrated states,

Japan and India can drive industrial policy from the center (e.g. METI, DPIIT, DRDO). The U.S. governance is fragmented across federal, state, and local actors:

• CHIPS Act (federal)
• DARPA, NSF, DOE labs (semi-independent)
• State-led incentives (e.g. Texas for Tesla, Arizona for TSMC)

America excels at competitive dynamism but struggles to align on national missions — e.g., a coherent strategy for semiconductors, rare earths, or supply chain resilience. There are good reasons, of course:

• Now-defunct East Germany or Russia or Mao’s China can sing a song about “Centrally Planned Economies” (the Germans have a great word for it: Zentralverwaltungswirtschaft)
• The strength of a federated system of states is exactly local policies for local needs. And local execution of federal policies.
• The thought that “the market will right itself, supply and demand”. Well ….

I believe the extremes of centrally planned innovation (*yikes!*) would be devastating. I still have found no evidence of a better system, sustainable over long periods of time, than the capitalistic system. But there is a middle path that’s worth investigating.

Implications for U.S. Policy Reform for Industrial Resilience

To emulate some of the resilience seen in Israel, Japan, and India, the U.S. would need:

1. A standing Industrial Strategy Office (à la METI)
2. Reformed procurement aligned with resilience and sovereignty, not just cost
3. Integrated dual-use bridges between DARPA, CFIUS, DIU, and commercial R&D
4. A shift from “innovation theater” to infrastructure memory and manufacturing depth