Selective industrial policy and innovation resource misallocation

Abstract

Innovation resource misallocation is a major obstacle to improving innovation quality and economic efficiency. This study draws on a quasi-natural experiment designed from the “Ten Industrial Rejuvenation Plan” (TIRP) in China and investigates how selective industrial policy impacts innovation resource misallocation. The results show that the TIRP intensifies innovation resource misallocation and that this impact persists even after the policy terminates. Mechanism analyses reveal that TIRP-induced disparities in innovation resource accessibility among firms with varying productivity are potential causes. Specifically, the TIRP raises innovation personnel, innovation capital, and government subsidies for low-productivity firms but lowers them for high-productivity firms. The financing constraints of the low-productivity firm groups ease, whereas those of the high-productivity firm groups worsen. Heterogeneity examinations demonstrate that the exacerbating influence is more noticeable in businesses with state-owned attributes and in low-marketization regions. These findings deepen our understanding of policy interventions and innovation development in emerging nations.