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The Causal Effects of an Industrial Policy

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  • Criscuolo, Chiara

    ()
    (OECD)

  • Martin, Ralf

    ()
    (Imperial College London)

  • Overman, Henry

    ()
    (London School of Economics)

  • Van Reenen, John

    ()
    (CEP, London School of Economics)

Abstract

Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs ("Regional Selective Assistance"). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that "cost per job" of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6323.

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Length: 55 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6323

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Keywords: industrial policy; regional policy; employment; investment; productivity;

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References

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  1. Wren, Colin & Taylor, Jim, 1999. "Industrial Restructuring and Regional Policy," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 487-516, July.
  2. 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.
  3. Mayer, Thierry & Mayneris, Florian & Py, Loriane, 2012. "The Impact of Urban Enterprise Zones on Establishments' Location Decisions: Evidence from French ZFUs," CEPR Discussion Papers 9074, C.E.P.R. Discussion Papers.
  4. Martin, Philippe & Mayer, Thierry & Mayneris, Florian, 2008. "Public Support to Clusters: A Firm Level Study of French “Local Productive Systems”," CEPR Discussion Papers 7102, C.E.P.R. Discussion Papers.
  5. Gobillon, Laurent & Magnac, Thierry & Selod, Harris, 2012. "Do unemployed workers benefit from enterprise zones? The French experience," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 881-892.
  6. John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," NBER Working Papers 16300, National Bureau of Economic Research, Inc.
  7. Ruane, Frances P., 1982. "Corporate income tax, investment grants, and the cost of capital," Journal of Public Economics, Elsevier, vol. 17(1), pages 103-109, February.
  8. Blundell, Richard William & Costa Dias, Monica & Meghir, Costas & Van Reenen, John, 2003. "Evaluating the Employment Impact of a Mandatory Job Search Programme," CEPR Discussion Papers 3786, C.E.P.R. Discussion Papers.
  9. Raffaello Bronzini & Eleonora Iachini, 2011. "Are incentives for R&D effective? Evidence from a regression discontinuity approach," Temi di discussione (Economic working papers) 791, Bank of Italy, Economic Research and International Relations Area.
  10. Edward L. Glaeser & Joshua D. Gottlieb, 2008. "The Economics of Place-Making Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 155-253.
  11. Dan A. Black & Jeffrey A. Smith & Mark C. Berger & Brett J. Noel, 2003. "Is the Threat of Reemployment Services More Effective Than the Services Themselves? Evidence from Random Assignment in the UI System," American Economic Review, American Economic Association, vol. 93(4), pages 1313-1327, September.
  12. Takalo, Tuomas & Tanayama, Tanja & Toivanen, Otto, 2008. "Evaluating innovation policy: a structural treatment effect model of R&D subsidies," Research Discussion Papers 7/2008, Bank of Finland.
  13. Neumark, David & Kolko, Jed, 2010. "Do enterprise zones create jobs? Evidence from California's enterprise zone program," Journal of Urban Economics, Elsevier, vol. 68(1), pages 1-19, July.
  14. Bond, Stephen & Van Reenen, John, 2007. "Microeconometric Models of Investment and Employment," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 65 Elsevier.
  15. Richard Harris & Catherine Robinson, 2005. "Impact of Regional Selective Assistance on sources of productivity growth: Plant-level evidence from UK manufacturing, 1990-98," Regional Studies, Taylor & Francis Journals, vol. 39(6), pages 751-765.
  16. Xulia Gonz�lez & Jordi Jaumandreu & Consuelo Pazo, 2005. "Barriers to Innovation and Subsidy Effectiveness," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 930-949, Winter.
  17. Devereux, Michael P. & Griffith, Rachel & Simpson, Helen, 2007. "Firm location decisions, regional grants and agglomeration externalities," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 413-435, April.
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  20. Daniel J. Wilson, 2009. "Beggar Thy Neighbor? The In-State, Out-of-State, and Aggregate Effects of R&D Tax Credits," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 431-436, May.
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Cited by:
  1. Mayer, Thierry & Mayneris, Florian & Py, Loriane, 2012. "The Impact of Urban Enterprise Zones on Establishments' Location Decisions: Evidence from French ZFUs," CEPR Discussion Papers 9074, C.E.P.R. Discussion Papers.
  2. William Kerr & Ufuk Akcigit & Nicholas Bloom & Daron Acemoglu, 2012. "Innovation, Reallocation and Growth," 2012 Meeting Papers 1137, Society for Economic Dynamics.
  3. Neil Foster-McGregor & Mario Holzner & Michael Landesmann & Johannes Pöschl & Robert Stehrer & Roman Stöllinger, 2013. "A ‘Manufacturing Imperative’ in the EU – Europe's Position in Global Manufacturing and the Role of Industrial Policy," wiiw Research Reports 391, The Vienna Institute for International Economic Studies, wiiw.
  4. Dhillon, Amrita & Iversen, Vegard & Torsvik, Gaute, 2012. "Employee referral, social proximity and worker discipline," CAGE Online Working Paper Series 90, Competitive Advantage in the Global Economy (CAGE).
  5. Becker, Sascha O. & Egger, Peter H. & von Ehrlich, Maximilian, 2010. "Going NUTS: The effect of EU Structural Funds on regional performance," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 578-590, October.
  6. Giorgio Barba Navaretti & Anthony J. Venables, 2013. "Multinationals and Industrial Policy," Development Working Papers 352, Centro Studi Luca d\'Agliano, University of Milano, revised 24 Apr 2013.
  7. Kim Swales, 2008. "The Relative Efficiency of Automatic and Discretionary Industrial Aid," Working Papers 0812, University of Strathclyde Business School, Department of Economics.
  8. Cerqua, Augusto & Pellegrini, Guido, 2014. "Do subsidies to private capital boost firms' growth? A multiple regression discontinuity design approach," Journal of Public Economics, Elsevier, vol. 109(C), pages 114-126.
  9. Bernini, Cristina & Pellegrini, Guido, 2011. "How are growth and productivity in private firms affected by public subsidy? Evidence from a regional policy," Regional Science and Urban Economics, Elsevier, vol. 41(3), pages 253-265, May.
  10. Guido Pellegrini & Augusto Cerqua, 2011. "Are the subsidies to private capital useful? A Multiple Regression Discontinuity Design Approach1," ERSA conference papers ersa11p1323, European Regional Science Association.
  11. Stephen Gibbons & Teemu Lyytikäinen & Henry Overman & Rosa Sanchis-Guarner, 2012. "New Road Infrastructure: the Effects on Firms," SERC Discussion Papers 0117, Spatial Economics Research Centre, LSE.
  12. Richard Harris & John Moffat, 2011. "Plant-level Determinants of Total Factor Productivity in Great Britain, 1997-2006," SERC Discussion Papers 0064, Spatial Economics Research Centre, LSE.
  13. Kristian Behrens, 2013. "Strength in Numbers? The Weak Effect of Manufacturing Clusters on Canadian Productivity," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 377, April.

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