IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v133y2021ics0014292121000271.html
   My bibliography  Save this article

Industrial policy at work: Evidence from Romania’s income tax break for workers in IT

Author

Listed:
  • Manelici, Isabela
  • Pantea, Smaranda

Abstract

We study the firm and sector-level effects of an industrial policy designed to support the development of the IT sector in Romania. In 2001, Romania introduced an unexpected personal income tax break to programmers with eligible bachelor’s degrees and who work on software development for firms in eligible IT sector codes. In 2013, policy-makers suddenly expanded the scope of the original tax break to cover more bachelor’s degrees and sector codes in IT. We first use firm-level data and difference-in-difference designs around each policy episode to show that treated firms experience strong and long-lasting growth. We then employ sector-level data and a synthetic control design to show that after the introduction of this policy in 2001, the IT sector grew faster in Romania than in otherwise similar countries. Finally, downstream sectors relying more on IT services also grew faster in Romania after 2001. Our results suggest that this policy has been effective in promoting the development of the IT sector, a sector typically seen as key to the transition to a knowledge economy.

Suggested Citation

  • Manelici, Isabela & Pantea, Smaranda, 2021. "Industrial policy at work: Evidence from Romania’s income tax break for workers in IT," European Economic Review, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:eecrev:v:133:y:2021:i:c:s0014292121000271
    DOI: 10.1016/j.euroecorev.2021.103674
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292121000271
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2021.103674?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Reda Cherif & Fuad Hasanov, 2019. "The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy," IMF Working Papers 2019/074, International Monetary Fund.
    2. Dale W. Jorgenson & Mun S. Ho & Kevin J. Stiroh, 2008. "A Retrospective Look at the U.S. Productivity Growth Resurgence," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 3-24, Winter.
    3. Philippe Aghion & Jing Cai & Mathias Dewatripont & Luosha Du & Ann Harrison & Patrick Legros, 2022. "Industrial Policy and Competition," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 15, pages 349-380, World Scientific Publishing Co. Pte. Ltd..
    4. Bruce A. Blonigen, 2016. "Industrial Policy and Downstream Export Performance," Economic Journal, Royal Economic Society, vol. 126(595), pages 1635-1659, September.
    5. Emmanuel Saez & Benjamin Schoefer & David Seim, 2019. "Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden," American Economic Review, American Economic Association, vol. 109(5), pages 1717-1763, May.
    6. Holger Görg & Michael Henry & Eric Strobl, 2008. "Grant Support and Exporting Activity," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 168-174, February.
    7. Jonas Månsson & A. Quoreshi, 2015. "Evaluating regional cuts in the payroll tax from a firm perspective," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 54(2), pages 323-347, March.
    8. Lokshin, Boris & Mohnen, Pierre, 2013. "Do R&D tax incentives lead to higher wages for R&D workers? Evidence from The Netherlands," Research Policy, Elsevier, vol. 42(3), pages 823-830.
    9. Aki Kangasharju, 2007. "Do Wage Subsidies Increase Employment in Subsidized Firms?," Economica, London School of Economics and Political Science, vol. 74(293), pages 51-67, February.
    10. Irem Guceri, 2018. "Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 1-63, February.
    11. Bart van Ark & Robert Inklaar & Robert H. McGuckin, 2003. "ICT and Productivity in Europe and the United States Where Do the Differences Come From?," CESifo Economic Studies, CESifo Group, vol. 49(3), pages 295-318.
    12. Joya, Omar & Rougier, Eric, 2019. "Do (all) sectoral shocks lead to aggregate volatility? Empirics from a production network perspective," European Economic Review, Elsevier, vol. 113(C), pages 77-107.
    13. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    14. Goolsbee, Austan, 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?," American Economic Review, American Economic Association, vol. 88(2), pages 298-302, May.
    15. Eric Rougier & O. Joya, 2019. "Do (all) sectoral shocks lead to aggregate volatility ? A production network perspective," Post-Print hal-02273192, HAL.
    16. Bruce Greenwald & Joseph E. Stiglitz, 2006. "Helping Infant Economies Grow: Foundations of Trade Policies for Developing Countries," American Economic Review, American Economic Association, vol. 96(2), pages 141-146, May.
    17. Richard Kneller & Jonathan Timmis, 2016. "ICT and Exporting: The Effects of Broadband on the Extensive Margin of Business Service Exports," Review of International Economics, Wiley Blackwell, vol. 24(4), pages 757-796, September.
    18. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    19. Carluccio, Juan & Fally, Thibault, 2013. "Foreign entry and spillovers with technological incompatibilities in the supply chain," Journal of International Economics, Elsevier, vol. 90(1), pages 123-135.
    20. Chiara Criscuolo & Ralf Martin & Henry G. Overman & John Van Reenen, 2019. "Some Causal Effects of an Industrial Policy," American Economic Review, American Economic Association, vol. 109(1), pages 48-85, January.
    21. Luosha Du & Ann Harrison & Gary Jefferson, 2022. "FDI Spillovers and Industrial Policy: The Role of Tariffs and Tax Holidays," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 9, pages 215-232, World Scientific Publishing Co. Pte. Ltd..
    22. Rodrik, Dani, 2004. "Industrial Policy for the Twenty-First Century," CEPR Discussion Papers 4767, C.E.P.R. Discussion Papers.
    23. Sebastian Galiani & Brian Quistorff, 2017. "The synth runner package: Utilities to automate synthetic control estimation using synth," Stata Journal, StataCorp LP, vol. 17(4), pages 834-849, December.
    24. Chris Forman & Avi Goldfarb & Shane Greenstein, 2012. "The Internet and Local Wages: A Puzzle," American Economic Review, American Economic Association, vol. 102(1), pages 556-575, February.
    25. Kaiser, Ulrich & Kuhn, Johan M., 2016. "Worker-level and firm-level effects of a wage subsidy program for highly educated labor: Evidence from Denmark," Research Policy, Elsevier, vol. 45(9), pages 1939-1943.
    26. Pinelopi Koujianou Goldberg & Amit Kumar Khandelwal & Nina Pavcnik & Petia Topalova, 2010. "Imported Intermediate Inputs and Domestic Product Growth: Evidence from India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1727-1767.
    27. Nathaniel Lane, 2020. "The New Empirics of Industrial Policy," Journal of Industry, Competition and Trade, Springer, vol. 20(2), pages 209-234, June.
    28. Claudia Steinwender, 2018. "Real Effects of Information Frictions: When the States and the Kingdom Became United," American Economic Review, American Economic Association, vol. 108(3), pages 657-696, March.
    29. Kee, Hiau Looi, 2015. "Local intermediate inputs and the shared supplier spillovers of foreign direct investment," Journal of Development Economics, Elsevier, vol. 112(C), pages 56-71.
    30. Girma, Sourafel & Görg, Holger & Strobl, Eric & Walsh, Frank, 2008. "Creating jobs through public subsidies: An empirical analysis," Labour Economics, Elsevier, vol. 15(6), pages 1179-1199, December.
    31. Jakob Munch & Georg Schaur, 2018. "The Effect of Export Promotion on Firm-Level Performance," American Economic Journal: Economic Policy, American Economic Association, vol. 10(1), pages 357-387, February.
    32. Petia Topalova & Amit Khandelwal, 2011. "Trade Liberalization and Firm Productivity: The Case of India," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 995-1009, August.
    33. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4039-4214, Elsevier.
    34. Paul Beaudry & Mark Doms & Ethan Lewis, 2010. "Should the Personal Computer Be Considered a Technological Revolution? Evidence from U.S. Metropolitan Areas," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 988-1036.
    35. Philippe Aghion & Julian Boulanger & Elie Cohen, 2011. "Rethinking industrial policy," Policy Briefs 566, Bruegel.
    36. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2012. "Americans Do IT Better: US Multinationals and the Productivity Miracle," American Economic Review, American Economic Association, vol. 102(1), pages 167-201, February.
    37. Forslid, Rikard & Midelfart, Karen Helene, 2005. "Internationalisation, industrial policy and clusters," Journal of International Economics, Elsevier, vol. 66(1), pages 197-213, May.
    38. Lombardi, Stefano & Skans, Oskar Nordström & Vikström, Johan, 2018. "Targeted wage subsidies and firm performance," Labour Economics, Elsevier, vol. 53(C), pages 33-45.
    39. Succar, Patricia, 1987. "The Need for Industrial Policy in LDC's--A Re-statement of the Infant Industry Argument," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 521-534, June.
    40. Ernest Liu, 2019. "Industrial Policies in Production Networks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 1883-1948.
    41. repec:dgr:rugccs:200311 is not listed on IDEAS
    42. Ark, Bart van & Inklaar, Robert & McGuckin, Robert H., 2003. "ICT and productivity in Europe and the United States," CCSO Working Papers 200311, University of Groningen, CCSO Centre for Economic Research.
    43. Sørensen, Bent E & Kalemli-Özcan, Sebnem & Volosovych, Vadym & Villegas-Sanchez, Carolina & Yesiltas, Sevcan, 2015. "How to construct nationally representative firm level data from the ORBIS global database," CEPR Discussion Papers 10829, C.E.P.R. Discussion Papers.
    44. Zhao Chen & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2021. "Notching R&D Investment with Corporate Income Tax Cuts in China," American Economic Review, American Economic Association, vol. 111(7), pages 2065-2100, July.
    45. Dani Rodrik, 2008. "Normalizing Industrial Policy," World Bank Publications - Books, The World Bank Group, number 28009, December.
    46. Rodrik, Dani, 1996. "Coordination failures and government policy: A model with applications to East Asia and Eastern Europe," Journal of International Economics, Elsevier, vol. 40(1-2), pages 1-22, February.
    47. Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
    48. Bart van Ark & Mary O'Mahoney & Marcel P. Timmer, 2008. "The Productivity Gap between Europe and the United States: Trends and Causes," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 25-44, Winter.
    49. Sebnem Kalemli-Ozcan & Bent Sorensen & Carolina Villegas-Sanchez & Vadym Volosovych & Sevcan Yesiltas, 2015. "How to Construct Nationally Representative Firm Level Data from the Orbis Global Database: New Facts and Aggregate Implications," NBER Working Papers 21558, National Bureau of Economic Research, Inc.
    50. Abadie, Alberto & Diamond, Alexis & Hainmueller, Jens, 2010. "Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program," Journal of the American Statistical Association, American Statistical Association, vol. 105(490), pages 493-505.
    51. Pack, Howard & Westphal, Larry E., 1986. "Industrial strategy and technological change : Theory versus reality," Journal of Development Economics, Elsevier, vol. 22(1), pages 87-128, June.
    52. Banai, Ádám & Lang, Péter & Nagy, Gábor & Stancsics, Martin, 2020. "Waste of money or growth opportunity: The causal effect of EU subsidies on Hungarian SMEs," Economic Systems, Elsevier, vol. 44(1).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2023. "Credit as an instrument for growth: A monetary explanation of the Chinese growth story," W.E.P. - Würzburg Economic Papers 107, University of Würzburg, Department of Economics.
    2. Masagus M. Ridhwan & Rizki Nauli Siregar & Jahen F. Rezki, 2022. "Superstar Firms, Productivity And Technological Progress: Evidence From Indonesia’S Manufactoring Sector," Working Papers WP/10/2022, Bank Indonesia.
    3. Sebastian Siegloch & Nils Wehrhöfer & Tobias Etzel, 2022. "Spillover, Efficiency and Equity Effects of Regional Firm Subsidies," ECONtribute Discussion Papers Series 210, University of Bonn and University of Cologne, Germany.
    4. Gustavo de Souza, 2023. "R&D Subsidy and Import Substitution: Growing in the Shadow of Protection," Working Paper Series WP 2023-37, Federal Reserve Bank of Chicago.
    5. Sergey M. Drobyshevsky & Andrew V. Korytin & Natalya S. Kostrykina, 2023. "Effectiveness Assessment of Tax Benefits in Terms of Reduced Rates of Insurance Contributions for IT-companies in Russia," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 9(3), pages 376-397.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nathaniel Lane, 2020. "The New Empirics of Industrial Policy," Journal of Industry, Competition and Trade, Springer, vol. 20(2), pages 209-234, June.
    2. Leonardo Iacovone & Mariana Pereira-López & Marc Schiffbauer, 2017. "ICT Use, Competitive Pressures, and Firm Performance in Mexico," The World Bank Economic Review, World Bank, vol. 30(Supplemen), pages 109-118.
    3. Li, Qing & Wu, Yanrui, 2020. "Intangible capital, ICT and sector growth in China," Telecommunications Policy, Elsevier, vol. 44(1).
    4. Jonas Hjort & Jonas Poulsen, 2019. "The Arrival of Fast Internet and Employment in Africa," American Economic Review, American Economic Association, vol. 109(3), pages 1032-1079, March.
    5. Giovanni Dosi & Andrea Roventini & Emmanuele Russo, 2020. "Public Policies And The Art Of Catching Up," Working Papers hal-03242369, HAL.
    6. Giovanni Dosi & Andrea Roventini & Emanuele Russo, 2021. "Public policies and the art of catching up: matching the historical evidence with a multicountry agent-based model [Catching up, forging ahead, and falling behind]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(4), pages 1011-1036.
    7. Beverelli, Cosimo & Fiorini, Matteo & Hoekman, Bernard, 2017. "Services trade policy and manufacturing productivity: The role of institutions," Journal of International Economics, Elsevier, vol. 104(C), pages 166-182.
    8. Ondřej Dvouletý & Stjepan Srhoj & Smaranda Pantea, 2021. "Public SME grants and firm performance in European Union: A systematic review of empirical evidence," Small Business Economics, Springer, vol. 57(1), pages 243-263, June.
    9. Anders Akerman & Ingvil Gaarder & Magne Mogstad, 2015. "The Skill Complementarity of Broadband Internet," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1781-1824.
    10. Castillo, Victoria & Figal Garone, Lucas & Maffioli, Alessandro & Salazar, Lina, 2017. "The causal effects of regional industrial policies on employment: A synthetic control approach," Regional Science and Urban Economics, Elsevier, vol. 67(C), pages 25-41.
    11. Lane, Nathaniel, 2016. "Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea," SocArXiv 6tqax, Center for Open Science.
    12. Pian Shu & Claudia Steinwender, 2019. "The Impact of Trade Liberalization on Firm Productivity and Innovation," Innovation Policy and the Economy, University of Chicago Press, vol. 19(1), pages 39-68.
    13. repec:hal:spmain:info:hdl:2441/3s3jn8tt5h9mab7fo128gecbhj is not listed on IDEAS
    14. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2023. "Credit as an instrument for growth: A monetary explanation of the Chinese growth story," W.E.P. - Würzburg Economic Papers 107, University of Würzburg, Department of Economics.
    15. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20 [Dealing with Structural Change. Annual Report 2019/20]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920.
    16. Auboin, Marc & Koopman, Robert & Xu, Ankai, 2021. "Trade and innovation policies: Coexistence and spillovers," Journal of Policy Modeling, Elsevier, vol. 43(4), pages 844-872.
    17. Xian Jiang, 2023. "Information and Communication Technology and Firm Geographic Expansion," CESifo Working Paper Series 10452, CESifo.
    18. Maican, Florin G., 2012. "From Boom to Bust and Back Again: A dynamic analysis of IT services," Working Papers in Economics 543, University of Gothenburg, Department of Economics.
    19. Gordon, Robert J. & Sayed, Hassan, 2020. "Transatlantic Technologies: The Role of ICT in the Evolution of U.S. and European Productivity Growth," CEPR Discussion Papers 15011, C.E.P.R. Discussion Papers.
    20. Irene Brambilla, 2018. "Digital Technology Adoption and Jobs: A Model of Firm Heterogeneity," Department of Economics, Working Papers 117, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
    21. Łukasz Arendt, 2016. "Paradoks Solowa i determinanty wdrożenia technologii informacyjnych i telekomunikacyjnych," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 29-53.

    More about this item

    Keywords

    Industrial policy; Firm growth; Economic development; Information technology; Labor income taxation; Central and eastern europe; Downstream effects;
    All these keywords.

    JEL classification:

    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:133:y:2021:i:c:s0014292121000271. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.