Redefining Industrial Policy: The Inflation Reduction Act's Impact on European Businesses

Abstract

The Inflation Reduction Act (‘IRA’) is the largest climate legislation passed in the US, committing almost $400 B to the energy transition. The act is designed with local content requirements favouring domestic production, making it highly essential to understand its impact on global corporations in the clean energy sector. This thesis determines the spillover effects of the IRA in Europe. Previous research debates the effects of industrial policy, claiming both positive and negative consequences of the IRA. In examining in what manner industrial policies influence firms’ strategic approach, this thesis applies historical institutionalism and the OLI Model. The spillover effects are explored through interviews with policy experts, renewable energy firms and advisors, and evaluated with qualitative and quantitative secondary data. This thesis argues that the spillover effects of the IRA are not transformative but wide-reaching, accelerating political processes, firm activity and green transition. The findings illustrate spillovers across several dimensions, from social and political to economic, stating that the IRA boosts social and green conditions and pushes political developments, expanding the markets of European firms. European firms should expand their operations to the US, capitalising on the knowledge spillovers and predictability following the IRA. The paper finds that international firms can strategically leverage industrial policies, thereby contesting the perceived exclusivity traditionally attributed to domestic firms. It also argues that policies enhance international firms' embeddedness in international networks.