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Selective industrial policy and capital misallocation: evidence from the ‘Revitalization Plan for Ten Industries’ in China

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  • Xiulu Huang
  • Pengfei Ge
  • Bole Zhou

Abstract

Capital misallocation is a main obstacle to China’s economic development. This paper deploys a quasi-natural experiment formed by the ‘Revitalization Plan for Ten Industries’ (RPTI) and examines the impacts that selective industrial policies have on capital misallocation. It is found that the RPTI significantly exacerbates capital misallocation and that the effect does not disappear when the RPTI ends. Mechanism analysis indicates that the RPTI significantly increases the capital productivity of firm groups with high capital productivity but significantly reduces the capital productivity of firm groups with low capital productivity. This can be further interpreted by a decrease or an increase of inefficient investment and financial constraints faced by the corresponding firm groups. The documented relationship is stronger in state-owned enterprises and in firms located in areas of high marketization. Our findings advance the understanding of governmental policy intervention in developing countries.

Suggested Citation

  • Xiulu Huang & Pengfei Ge & Bole Zhou, 2024. "Selective industrial policy and capital misallocation: evidence from the ‘Revitalization Plan for Ten Industries’ in China," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 29(1), pages 206-236, January.
    • Handle: RePEc:taf:rjapxx:v:29:y:2024:i:1:p:206-236
    DOI: 10.1080/13547860.2021.2010378
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    Cited by:

    1. Fahmida Mostafiz, 2024. "Industrial Policy and The New Structural Economics Theory: A Transitional Economy Perspective," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 14(6), pages 1-24.

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