Is the pursuit of a competition-friendly industrial policy desirable? Evidence from Korea's post-Asian Financial Crisis policy shift

This paper evaluates the outcomes of Korea's post-Asian Financial Crisis shift toward competition-friendly industrial policy. In the wake of the 1997 crisis, Korea moved from a strategy of cultivating national champions toward reforms that emphasize market competition, but the efficacy of this approach remains disputed. Using a unique firm-level panel dataset from 2008–2023, we employ a granular bank lending shock identification strategy to isolate the causal impact of policy-directed credit on firm performance. Specifically, we examine how exogenous variations in policy-directed credit influence a firm’s physical investment, R&D expenditure, and total factor productivity (TFP), with industry market concentration as a moderating factor. The results indicate that increased policy-directed credit does not translate into consistent improvements in investment, innovation, or productivity at the firm level. However, its effects are significantly stronger in industries characterized by higher market concentration and export intensity. The evidence also suggests that innovative small firms in these industries exhibit stronger policy effects. These findings call into question the universal desirability of competition-friendly industrial policies. For trade-driven economies like Korea, policy intervention tends to be more effective when it incorporates consideration of industry-specific competitiveness in global markets and the realization of economies of scale. This paper provides nuanced insights and contributes new evidence to the literature on industrial policy and competition.