By Asoka S. Seneviratne –

“Economic development is not achieved by piling up capital, but by changing the organization of production.”
— Joseph A. Schumpeter

The recent Cabinet approval to establish the Industrial Transformation and Innovation Authority (ITIA) is among the most consequential policy decisions Sri Lanka has made during its post-crisis economic restructuring. While presented administratively as the amalgamation of the Industrial Development Board (IDB), the National Entrepreneurship Development Authority (NEDA), and the Small Business Development Division under the Ministry of Industry and Entrepreneurship Development, the reform’s more profound significance lies in what it symbolizes: a long-overdue recognition that Sri Lanka must move beyond fragmented industrial support mechanisms toward a unified, transformation-oriented institutional framework.

For decades, Sri Lanka’s industrial policy has focused primarily on expansion—building factories, promoting small enterprises, and creating employment. Yet this approach has delivered limited results in terms of productivity, technological sophistication, and global competitiveness. The creation of ITIA signals an essential shift in thinking: that industrial development alone is no longer sufficient, and that industrial transformation and innovation must now sit at the heart of national economic strategy.

This article examines the role of ITIA through the analytical lens of W.W. Rostow’s Stages of Economic Growth, clarifies the often-confused distinctions between industrial development, industrial transformation, and innovation, and assesses the challenges Sri Lanka must overcome if ITIA is to fulfil its mandate. Drawing on the experience of Asian economies that have successfully transformed their industrial bases, the article argues that ITIA can become a pivotal institution in Sri Lanka’s transition toward sustained, high-quality economic growth.

Rostow’s Stages of Economic Growth and the Central Role of Industry

Walt Whitman Rostow’s Stages of Economic Growth (1960) remains one of the most influential frameworks for understanding long-term development trajectories. Although criticized for its linearity and Western bias, Rostow’s core proposition—that development involves a structural shift from traditional agricultural production to modern industry—continues to offer valuable insights for countries seeking to escape economic stagnation.

Rostow identified five stages of growth, culminating in the “Age of High Mass Consumption.” Crucially, the transition from the “Take-Off” stage to the “Drive to Maturity” stage is marked not by the mere existence of industry, but by its (i) deepening, (ii) diversification, and (iii) technological upgrading. In this phase, industry becomes the dominant driver of productivity growth, innovation spreads across sectors, and the economy becomes resilient to external shocks.

Sri Lanka can reasonably be viewed as having passed the initial “Take-Off” stage. Manufacturing, infrastructure development, and export-oriented industries have long been part of the economic landscape. However, the country has struggled to progress decisively into the “Drive to Maturity” stage. Growth has been episodic, productivity gains modest, and industrial diversification limited.

The establishment of ITIA must therefore be understood as an institutional attempt to address this structural stagnation. By explicitly incorporating “transformation” and “innovation” into its mandate, ITIA aligns closely with the requirements of Rostow’s fourth stage of development, where the quality of growth matters more than quantity.

Sri Lanka’s Industrial Performance: Structural Weakness Beneath Longevity

Despite nearly three decades of institutional support for industry, Sri Lanka’s industrial sector remains comparatively underdeveloped. In 2024, industry accounted for only 26.7 %  of GDP, significantly lower than in regional peers such as China (36.5%), Thailand (35%) , and South Korea (31.6%). This underperformance is particularly concerning given that the IDB was established in 1996 with the explicit objective of spearheading industrial development.

The persistence of a relatively small industrial base points to a deeper issue: the failure to move beyond low-value, labor-intensive production. While Sri Lanka has expanded small and medium-sized enterprises, these firms have largely remained disconnected from global value chains and advanced manufacturing ecosystems. Export industries continue to rely on a narrow range of products, and domestic industries struggle to achieve economies of scale or technological depth.

These shortcomings underline a critical lesson: industrial longevity does not automatically translate into industrial maturity. Without transformation, industrial development risks becoming self-limiting, vulnerable to competition, and incapable of driving long-term growth.

Industrial Development, Industrial Transformation, and Innovation: A Necessary Distinction

One of the most persistent challenges in Sri Lanka’s policy discourse is the tendency to use “industrial development,” “industrial transformation,” and “innovation” interchangeably. In reality, these concepts describe distinct but interconnected processes, each representing a different level of economic change.

Industrial development refers to the establishment and expansion of industrial capacity. It is concerned with increasing the number of factories, expanding infrastructure, mobilizing labour, and raising output. This phase is essential for job creation and initial growth, particularly in developing economies transitioning away from agriculture. However, it remains primarily quantitative in nature.

Industrial transformation, by contrast, represents a qualitative shift in how industry operates. It involves the adoption of advanced technologies, the reorganization of production processes, integration into regional and global value chains, and a move toward higher value-added activities—transformation changes not just the scale of industry, but its internal logic and competitive positioning.

Innovation sits at the apex of this progression. It refers to the creation and commercialization of new products, processes, and business models. Innovation sustains transformation over time and ensures that industrial systems remain adaptive in the face of technological and market change.

A helpful metaphor is that industrial development allows a tree to grow taller, while industrial transformation enables the tree to change its DNA to survive in a new climate. Innovation determines whether the tree continues to evolve or becomes obsolete.

The Automotive Industry in 2025: A Contemporary Illustration

The global automotive industry in 2025 offers a vivid illustration of the coexistence—and necessity—of industrial development and industrial transformation. Around the world, governments and firms are investing heavily in new factories, battery plants, and supply-chain infrastructure to support the transition to electric vehicles. These investments represent classic industrial development, creating employment and expanding productive capacity.

At the same time, the industry is undergoing a profound transformation. Vehicles are increasingly software-driven, manufacturing processes are digitally optimized through artificial intelligence and automation, and sustainability considerations are reshaping product design and production systems. The competitive advantage of automotive firms now lies less in mechanical engineering alone and more in software capability, data analytics, and system integration.

This dual process highlights a critical insight for Sri Lanka: building industrial capacity without transforming how that capacity functions is no longer viable. In a global economy defined by rapid technological change, transformation is the key determinant of industrial survival and success.

The Strategic Significance of ITIA

The creation of ITIA reflects an awareness that industrial transformation cannot be achieved through fragmented institutions and isolated policy interventions. By unifying industrial development, entrepreneurship promotion, and small business support under a single authority, the Government has laid the groundwork for a more integrated approach to industrial policy.

If effectively designed, (i) ITIA can act as a coordinating platform that aligns investment, (ii) skills development, (iii) technology adoption, and (iv) enterprise support. More importantly, it can shift the focus of policy from merely increasing the number of enterprises to enhancing their productivity, technological capability, and market integration.

In this sense, ITIA is not simply an administrative reform but a potential institutional catalyst for structural transformation.

Structural Challenges Facing ITIA

Despite its promise, ITIA will operate within a challenging environment shaped by long-standing structural constraints. Bureaucratic inertia, weak coordination among ministries, limited industry–university collaboration, and inadequate private-sector investment in research and development all pose significant risks. Additionally, Sri Lanka faces a persistent skills mismatch, particularly in areas critical to industrial transformation such as digital manufacturing, automation, and applied engineering.

There is also the risk that ITIA could replicate past patterns of overemphasis on small enterprises without addressing the need for scale, clustering, and value-chain integration. Without a clear strategic focus, the Authority could become a consolidation of existing inefficiencies rather than a driver of systemic change.

Lessons from Asia: Pathways to Successful Transformation

The experience of Asian economies shows that industrial transformation is neither accidental nor spontaneous. Countries such as South Korea, China, Malaysia, and Thailand succeeded through deliberate, coordinated strategies that aligned industrial policy with technological upgrading, export competitiveness, and human capital development.

A common thread across these experiences is (i) the presence of strong institutions with clear mandates, (ii) performance benchmarks, and (iii) close collaboration between the state and the private sector. Transformation was supported by(i) sustained investment in skills,(ii) research, and  (iii) infrastructure, as well as (iv) a willingness to adapt policy in response to changing global conditions.

For Sri Lanka, these lessons underscore the importance of ensuring that ITIA is empowered, accountable, and strategically focused.

Conclusion: A Landmark Opportunity for Sri Lanka

The establishment of the Industrial Transformation and Innovation Authority represents a landmark moment in Sri Lanka’s economic development journey. It signals a shift from a narrow focus on industrial expansion toward a broader vision of industrial maturity grounded in transformation and innovation.

(i) If ITIA is well organized, (ii) professionally managed, and (iii) strategically executed, it can reposition Sri Lanka within the Asian industrial landscape. More importantly, it can help the country move decisively into a higher stage of economic development, where growth is driven not by volume alone but by productivity, resilience, and value creation.

In an increasingly competitive global economy, the choice facing Sri Lanka is clear: continue to build more of the same, or transform how growth itself is achieved. ITIA offers the institutional foundation to choose the latter.

Summary

The creation of ITIA reflects Sri Lanka’s recognition that industrial development must evolve into industrial transformation and innovation. Viewed through Rostow’s framework, ITIA aligns with the requirements of the “Drive to Maturity” stage of growth. While significant structural challenges remain, international experience demonstrates that coordinated, transformation-focused institutions can deliver lasting economic progress. If effectively implemented, ITIA can become the lifeblood of Sri Lanka’s rapid economic growth and enable the country to stand shoulder to shoulder with leading Asian economies in the years ahead.

*The writer, among many served as the Special Advisor to the Office of the President of Namibia from 2006 to 2012 and was a Senior Consultant with the UNDP for 20 years. He was a Senior Economist with the Central Bank of Sri Lanka (1972-1993). He can be reached via asoka.seneviratne@gmail.com