  Against the background of renewed interest in vertical support policies
targeting specific industries or technologies, we investigate the effects of
vertical vs. horizontal policies in a combinatorial model of economic
development. In the framework we propose, an economy develops by acquiring new
capabilities allowing for the production of an ever greater variety of products
with an increasing complexity. Innovation policy can aim to expand the number
of capabilities (vertical policy) or the ability to combine capabilities
(horizontal policy). The model shows that for low-income countries, the two
policies are complementary. For high-income countries that are specialised in
the most complex products, focusing on horizontal policy only yields the
highest returns. We reflect on the model results in the light of the
contemporary debate on vertical policy.
