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Picking Winners? Government Subsidies and Firm Productivity in China

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Listed:
  • Lee G. Branstetter
  • Guangwei Li
  • Mengjia Ren

Abstract

Are Chinese industrial policies making the targeted Chinese firms more productive? Alternatively, are efforts to promote productivity undercut by efforts to maintain or expand employment in less productive enterprises? In this paper, we attempt to shed light on these questions through the analysis of previously underutilized microdata on direct government subsidies provided to China’s publicly traded firms. We categorize subsidies into different types. We then estimate total-factor productivity (TFP) for Chinese listed firms and investigate the relationship between these estimates of TFP and the allocation of government subsidies. We find little evidence that the Chinese government consistently “picks winners”. Firms’ ex-ante productivity is negatively correlated with subsidies received by firms, and subsidies appear to have a negative impact on firms’ ex-post productivity growth throughout our data window, 2007 to 2018. Neither subsidies given out under the name of R&D and innovation promotion nor industrial and equipment upgrading positively affect firms’ productivity growth. On the other hand, we find a positive impact of subsidy on current year employment, both for the aggregated and employment-related subsidies. These findings suggest that China’s increasingly prescriptive industrial policies may have generated limited effects in promoting productivity.

Suggested Citation

  • Lee G. Branstetter & Guangwei Li & Mengjia Ren, 2022. "Picking Winners? Government Subsidies and Firm Productivity in China," NBER Working Papers 30699, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:30699
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    Cited by:

    1. Dahlström, Petter & Lööf, Hans & Sjöholm, Fredrik & Stephan, Andreas, 2023. "The EU’s Competitive Advantage in the 'Clean-Energy Arms Race'," Working Paper Series 1483, Research Institute of Industrial Economics.
    2. Ting Feng & Zhongyi Xue, 2023. "The impact of government subsidies on corporate resilience: evidence from the COVID-19 shock," Economic Change and Restructuring, Springer, vol. 56(6), pages 4199-4221, December.
    3. François Chimits, 2023. "What Do We Know About Chinese Industrial Subsidies?," CEPII Policy Brief 2023-42, CEPII research center.

    More about this item

    JEL classification:

    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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