DP13889 China’s Industrial Policy: an Empirical Evaluation
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.