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The Long-Term Effects of Industrial Policy

Author

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  • Levchenko, Andrei
  • Choi, Jaedo

Abstract

This paper provides causal evidence on the impact of a large-scale industrial policy -- South Korea's Heavy and Chemical Industry (HCI) Drive -- on firms' long-term performance and quantifies its long-term welfare effects. Using unique historical data on the universe of firm-level subsidies and a natural experiment, we find large and persistent effects of this industrial policy. Subsidized firms grew faster than those never subsidized for 30 years after subsidies ended. Firms upstream from the subsidized firms also benefited from the policy. We build a quantitative heterogeneous firm model that rationalizes these effects through a combination of learning-by-doing and financial frictions. The model is calibrated to firm-level data, and its key parameters are disciplined with the econometric estimates. The HCI Drive generated larger benefits than costs. If it had not been implemented, South Korea's welfare would have been 7-12% lower, depending on how long-lived are the productivity benefits of learning-by-doing. The large majority of the total welfare impact comes from the long-term benefits of learning-by-doing rather than short-term benefits of relaxing financial constraints.

Suggested Citation

  • Levchenko, Andrei & Choi, Jaedo, 2021. "The Long-Term Effects of Industrial Policy," CEPR Discussion Papers 16534, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16534
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    Cited by:

    1. Akcigit, Ufuk & Alp, Harun & Diegmann, André & Serrano-Velarde, Nicolas, 2023. "Committing to grow: Privatizations and firm dynamics in East Germany," IWH Discussion Papers 17/2023, Halle Institute for Economic Research (IWH).
    2. 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.
    3. B. Ravikumar & Raymond G. Riezman & Yuzhe Zhang, 2022. "Private Information and Optimal Infant Industry Protection," CESifo Working Paper Series 9772, CESifo.
    4. Francesco Lamperti & Andrea Roventini, 2022. "Beyond climate economics orthodoxy: impacts and policies in the agent-based integrated-assessment DSK model," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 19(3), pages 357-380, December.
    5. Keren Chen, 2022. "Industrial Policy’s Effect on Cross-Border Mergers’ Decisions—Theoretical and Empirical Analysis," Sustainability, MDPI, vol. 14(20), pages 1-25, October.
    6. Klaus Gründler & Philipp Heil & Niklas Potrafke & Timo Wochner, 2023. "The US-Inflation Reduction Act: Global Assessments of Economic Experts," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 138, October.
    7. Bingqiang Li & Shan Wang & Nannan Dong & Jinzhi Li & Xi Li & He Yu, 2023. "Empirical Analysis of Subsidy Industrial Policy’s Effect on Export Innovation in the Chinese Manufacturing," SAGE Open, , vol. 13(4), pages 21582440231, November.

    More about this item

    Keywords

    Industrial policy; South korea; Hci drive; Learning-by-doing; Financial frictions; Welfare;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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