Working Paper: NBER ID: w29263
Authors: Jaedo Choi; Andrei A. Levchenko
Abstract: This paper provides causal evidence on the impact of a large-scale industrial policy – South Korea’s Heavy and Chemical Industry (HCI) Drive – on firms’ long-term performance and quantifies its long-term welfare effects. Using unique historical data on the universe of firm-level subsidies and a natural experiment, we find large and persistent effects of this industrial policy. Subsidized firms grew faster than those never subsidized for 30 years after subsidies ended. We build a quantitative heterogeneous firm model that rationalizes these effects through a combination of learning-by-doing and financial frictions. The model is calibrated to firm-level data, and its key parameters are disciplined with the econometric estimates. The HCI Drive generated larger benefits than costs. If it had not been implemented, South Korea’s welfare would have been 3-4% lower. The majority of the total welfare impact comes from the long-term productivity benefits of learning-by-doing.
Keywords: industrial policy; South Korea; HCI drive; long-term performance; welfare effects
JEL Codes: O14; O25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Doubling of the subsidy between 1973 and 1979 (H23) | 12 percentage point higher sales growth from 1982 to 2009 (L81) |
| 12 percentage point higher sales growth from 1982 to 2009 (L81) | 0.4 percentage point increase in the annual growth rate (O49) |
| Subsidies (H20) | improvements in total factor productivity (TFP) (O49) |
| Subsidized firms (L11) | faster growth of upstream suppliers (O49) |
| HCI drive (L63) | South Korea's welfare would have been 10.17% lower (D69) |