Working Paper: NBER ID: w26075
Authors: Panle Jia Barwick; Myrto Kalouptsidi; Nahim Bin Zahur
Abstract: Despite the historic prevalence of industrial policy and its current popularity, few empirical studies directly evaluate its welfare consequences. This paper examines an important industrial policy in China in the 2000s, aiming to propel the country’s shipbuilding industry to the largest globally. Using comprehensive data on shipyards worldwide and a dynamic model of firm entry, exit, investment, and production, we find that the scale of the policy was massive and boosted China’s domestic investment, entry, and world market share dramatically. On the other hand, it created sizable distortions and led to increased industry fragmentation and idleness. The effectiveness of different policy instruments is mixed: production and investment subsidies can be justified by market share considerations, but entry subsidies are wasteful. Finally, the distortions could have been significantly reduced by implementing counter-cyclical policies and by targeting subsidies towards more productive firms.
Keywords: industrial policy; shipbuilding; China; welfare analysis; subsidies
JEL Codes: L11; L51; L60; O2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Industrial policy in China's shipbuilding industry (O25) | Domestic investment (E22) |
| Industrial policy in China's shipbuilding industry (O25) | Entry rates (L11) |
| Industrial policy in China's shipbuilding industry (O25) | World market share (L17) |
| Entry subsidies (Z38) | Net profit gains for domestic producers (F14) |
| Production subsidies (H23) | Net profit gains for domestic producers (F14) |
| Industrial policy (O25) | Worldwide consumer surplus (F61) |
| Economic cycles (E32) | Effectiveness of industrial policy (L52) |
| Countercyclical policy (E63) | Effectiveness of industrial policy (L52) |
| Targeting subsidies towards more efficient firms (H32) | Policy distortions (H31) |