Abstract
Industrial policy, particularly through the provision of large-scale assistance to industry in the form of ‘tax holidays’ and subsidies to firms, is very important in China. A major contribution of this paper is to introduce firm-level measures of assistance directly into industry-level production functions determining firm output using Chinese firm-level panel data for 1998–2007 and analysing the impact of government assistance on TFP at the firm-level. Our results indicate inverted U-shaped gains from assistance: across the 26 industries considered, firms receiving assistance rates of 1–10, 10–19, 20–49 and 50+% experienced on average 4.5, 9.4, 9.2 and −3% gains in TFP level, respectively. We then decompose the growth of TFP and relate it to assistance and formal political connections between firms and the government. We find in general firms receiving assistance contributed relatively more to TFP growth than non-assisted firms. However, this was largely through new firms being ‘encouraged’ to start-up rather than through firms open throughout 1998 to 2007 improving. There is also evidence that closure rates were truncated as a result of assistance. Moreover, the better results for assisted firms was very much ‘driven’ by a sub-group that received assistance but had no formal political connections and were not State-owned.
Highlights
Providing assistance to industry as part of an industrial strategy has a long history, in both developing and developed economies (Schwartz and Clements 1999)
Their approach was essentially to test if subsidies were correlated with initial competition levels, where the latter was measured using a Lerner index. They measured the concentration of assistance across firms within each sector. Both the correlations obtained at the sector-city level and the Herfindahl indices were regressed on firm-level total factor productivity (TFP) estimates obtained using an Olley–Pakes approach
Industrial policy, through the provision of large-scale assistance to industry in the form of ‘tax holidays’ and subsidies to firms, is very important in China
Summary
Providing assistance to industry as part of an industrial strategy has a long history, in both developing and developed economies (Schwartz and Clements 1999). To check the robustness of our results, the impact of assistance is tested using a production function approach based on ‘matching’ firms receiving assistance with those not receiving ‘treatment’ who had very similar characteristics to the assisted subgroup (Imbens and Rubin 2015) Both sets of results indicate that across the 26 industries considered Chinese firms that received assistance had higher TFP during 1998–2007, there is some evidence that too high a level of assistance has negative consequences for TFP, suggesting that ‘rent-seeking’ and/or the pursuit of profit is blunted when firms become too dependent on government help, especially when such help is tied to ‘political control’ by the state (which is the case in China as explained below). The paper concludes with a summary and some ideas for further research that would extend the approach taken in this paper
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