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Industrial Policy and Competition

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  • Aghion, Philippe
  • Dewatripont, Mathias
  • Du, Liqun
  • Harrison, Ann
  • Legros, Patrick

Abstract

The economic slowdown in the 70s in Latin America and Japan in the late 90s, generated a growing skepticism about the role of industrial policy in the process of economic development. Yet, new considerations have emerged over the recent period, which invite us to revisit the issue. This paper argues that sectoral state aids tend to foster productivity, productivity growth, and product innovation to a larger extent when it targets more competitive sectors and when it is not concentrated on one or a small number of firms in the sector. Using a theoretical framework in which two firms may choose either to operate in the same "higher-growth" sector or in different, "lower-growth" sector. We use a panel of medium and large Chinese enterprises for the period 1998 through 2007 to test for complementarity between competition and industrial policy. A main implication from our analysis is that the debate on industrial policy should no longer be for or against having such a policy. As it turns out, sectoral policies are being implemented in one form or another by a large number of countries worldwide, starting with China. Rather, the issue should be on how to design and govern sectoral policies in order to make them more competition-friendly and therefore more growth-enhancing.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8619.

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Date of creation: Nov 2011
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Handle: RePEc:cpr:ceprdp:8619

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Keywords: application fees; competition; industrial policy; innovation and productivity; intellectual property policy; patent system; renewal fees;

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  1. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, Elsevier.
  2. Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self-Discovery," Working Paper Series rwp02-023, Harvard University, John F. Kennedy School of Government.
  3. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  4. Harrison, Ann E, 1994. "An Empirical Test of the Infant Industry Argument: Comment," American Economic Review, American Economic Association, vol. 84(4), pages 1090-95, September.
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