Industrial Policy and Competition
AbstractThis paper argues that sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly. First, we develop a model in which two firms can operate either in the same (higher growth) sector or in different sectors. To escape competition, firms can either innovate vertically or differentiate by chosing a different sector from its competitor. By forcing firms to operate in the same sector, sectoral policy induces them to innovate "vertically" rather than differentiate in order to escape competition with the other firm. The model predicts that sectoral targeting enhances average growth and productivity more when competition is more intense within a sector and when competition is preserved by the policy. In the second part of the paper, we test these predictions using a panel of medium and large Chinese enterprises for the period 1998 through 2007. Our empirical results suggest that if subsidies are allocated to competitive sectors (as measured by the Lerner index) and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant. We address the potential endogeneity of targeting and competition by using variations in targeting across Chinese cities that are exogenous to the individual firm.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18048.
Date of creation: May 2012
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Other versions of this item:
- D2 - Microeconomics - - Production and Organizations
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L6 - Industrial Organization - - Industry Studies: Manufacturing
- O2 - Economic Development, Technological Change, and Growth - - Development Planning and Policy
- O3 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-COM-2012-05-15 (Industrial Competition)
- NEP-SBM-2012-05-15 (Small Business Management)
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