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Industrial policy and capacity utilization: Evidence from China’s five-year plans

Author

Listed:
  • Li, Hui
  • Lu, Wenzhuo
  • Xie, Xiaochen
  • Yin, Heng

Abstract

This paper investigates the impact of government industrial policy on firm capacity utilization and resource misallocation. We develop an estimation methodology based on firm cost minimization to determine optimal and actual production capacities. Using China’s 12th Five-Year Plan, initiated in 2011, as a natural experiment, we apply a difference-in-differences estimation method. Our findings show that the policy support for targeted industries was associated with lower capacity utilization rates among Chinese firms. Mechanism analysis indicates that tax incentives fostered more optimistic market expectations, resulting in increased investments and higher production capacity. At the same time, these policies appear to have stimulated additional market entry, which, while promoting competition and technological upgrading, may have also led to smaller market shares per firm and potential resource allocation frictions.The real question about industrial policy is not whether it should be practiced, but how.— Dani Rodrik

Suggested Citation

  • Li, Hui & Lu, Wenzhuo & Xie, Xiaochen & Yin, Heng, 2026. "Industrial policy and capacity utilization: Evidence from China’s five-year plans," International Journal of Industrial Organization, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:indorg:v:104:y:2026:i:c:s0167718725001031
    DOI: 10.1016/j.ijindorg.2025.103237
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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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