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The Long-Term Effects of Industrial Policy

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  • 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.

Suggested Citation

  • Jaedo Choi & Andrei A. Levchenko, 2021. "The Long-Term Effects of Industrial Policy," NBER Working Papers 29263, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29263
    Note: DEV EFG IFM ITI
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    Cited by:

    1. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2023. "Credit as an instrument for growth: A monetary explanation of the Chinese growth story," W.E.P. - Würzburg Economic Papers 107, University of Würzburg, Department of Economics.
    2. Akcigit, Ufuk & Alp, Harun & Diegmann, André & Serrano-Velarde, Nicolas, 2024. "Committing to grow: Employment targets and firm dynamics," IWH Discussion Papers 17/2023, Halle Institute for Economic Research (IWH), revised 2024.
    3. Bartelme, Dominick & Lan, Ting & Levchenko, Andrei A., 2024. "Specialization, market access and real income," Journal of International Economics, Elsevier, vol. 150(C).
    4. Ufuk Akcigit & Harun Alp & André Diegmann & Nicolas Serrano-Velarde, 2023. "Committing to Grow: Privatizations and Firm Dynamics in East Germany," Working Papers 685, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. Max Brès & Philipp Kircher & David Koll, 2024. "Future Versus Today’s Improvements: The Trade-off of Place-Based Policies," CRC TR 224 Discussion Paper Series crctr224_2024_573, University of Bonn and University of Mannheim, Germany.
    6. Gloria, José & Miranda-Pinto, Jorge & Fleming-Muñoz, David, 2024. "Production network diversification and economic development," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 281-295.
    7. B. Ravikumar & Raymond Riezman & Yuzhe Zhang, 2022. "Private Information and Optimal Infant Industry Protection," Working Papers 2022-013, Federal Reserve Bank of St. Louis, revised 18 Apr 2024.
    8. Matilde Bombardini & Andres Gonzalez-Lira, 2024. "The Increasing Cost of Buying American," CESifo Working Paper Series 11339, CESifo.
    9. Francesco Lamperti & Andrea Roventini, 2022. "Beyond climate economics orthodoxy: impacts and policies in the agent-based integrated-assessment DSK model," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 19(3), pages 357-380, December.
    10. Keren Chen, 2022. "Industrial Policy’s Effect on Cross-Border Mergers’ Decisions—Theoretical and Empirical Analysis," Sustainability, MDPI, vol. 14(20), pages 1-25, October.
    11. Klaus Gründler & Philipp Heil & Niklas Potrafke & Timo Wochner, 2023. "The US-Inflation Reduction Act: Global Assessments of Economic Experts," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 138, September.
    12. Alessio Terzi & Monika Sherwood & Aneil Singh, 2023. "European industrial policy for the green and digital revolution," Science and Public Policy, Oxford University Press, vol. 50(5), pages 842-857.
    13. Bingqiang Li & Shan Wang & Nannan Dong & Jinzhi Li & Xi Li & He Yu, 2023. "Empirical Analysis of Subsidy Industrial Policy’s Effect on Export Innovation in the Chinese Manufacturing," SAGE Open, , vol. 13(4), pages 21582440231, November.

    More about this item

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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