THE EFFECT OF INDUSTRIAL POLICY

THE EFFECT OF INDUSTRIAL POLICY ON CORPORATE PERFORMANCE: EVIDENCE FROM PANEL DATA

C. Criscuolo et. Al

A Short Summary 

In a Nutshell

Most governments have industrial policies that claim to foster productivity and employment etc. but it is not possible to tell if they are just financing activities that would have been undertaken regardless of state funding. Comparison of outcomes with other firms does not work as a counterfactual as the sorting into firms that receive funding is far from random. This paper uses data from a quasi-experiment where changes in the eligibility criteria for assistance for the UK Regional Selective Assistance programme caused a change in the areas that were eligible to receive funds. Using RSA data they find that there is a large effect on the treated for employment, investment and probability of exit, and these effects are seriously underestimated if endogeneity is ignored. They cannot however rule out the possibility that there are negative aggregate productivity effects from protecting inefficient incumbents 

Further Details

The EU changed the eligibility rules such that areas were subject to different constraints in terms of how much funding they could receive from the government. Generally applied to manufacturing firms who needed funds for capex to create jobs, in a viable project setting. The applicant had to demonstrate need, and should be meeting the other expenses himself or otherwise from the private sector.

Specification

Yjt = αDjt + βXjt + ηj + τt + vjt  (4)

Due to data limitations, they aggregate across all plants in the same firm, and run above regression at the firm level. Note however that they use plant level data in order to later analyse area-level impact of industrial policy (thus capturing general equilibrium effects).

yjt is outcome of interest for firm j at time t. Authors consider three outcome variables: employment, investment and productivity. Xjt are covariates used as controls that vary depending on outcome of interest.

Djt is participation dummy– authors mainly use binary indicator to reflect if the firm received any treatment.

Instrument for Djt with Zjt , which is the level of the maximum investment subsidy (Net Grant Equivalent/NGE) available in the area where the firm’s oldest plant is (oldest as then the location decision will not have been made because of changes to the EU assistance map). Baseline results use mutually exclusive dummies for each of the different rates.

They instrument for participation in the programme using the changes to the system imposed by the EU.

The data set is a panel that combines admin data on the RSA participants, and matching them to a firm level database that gives employment, investment and entry/exit information. This means they can track firms before and after participation and compare them to a control group that did not participate.

Results

OLS results indicate a 37% increase in employment rising sensibly with the level of subsidy. The IV result is much larger suggesting serious downward bias in the OLS estimates. This is reduced to a much more sensible level when firm level dummies are included to control for heterogeneity of response to the treatment, but they are sensible and much larger than the OLS estimates with the same dummies included.

They do the same for labour productivity (measured as ration of gross output to employment) but the effects are small and insignificant.

They find a positive effect on employment at the area level (based on travel to work area) which indicates that there are spillovers from the RSA, and there is also a rise in the number of plants in an area. However, the employment effects on incumbents are stronger than an incentive to new entry as RSA dampens reallocation effects (due to less exit) and as there is no productivity effect from receiving RSA, it would appear that the scheme supports less productive firms and this could dampen aggregate productivity (especially since in the summary stats they show that the firms that receive RSA tend to be larger than the control firms).

Implications

Positive effect of programme on investment and employment but not on productivity. As the RSA helps firms to expand this could have a negative impact on aggregate productivity. Seems to be more characteristic of a welfare payment.

 

Advertisements

One Comment

  1. Posted May 23, 2012 at 2:36 pm | Permalink | Reply

    Reblogged this on Gabriel Regae comentado:
    Tratamento rigoroso do tema, usando um quasi-experimento na Inglaterra e mostra alguns resultados positivos, apesar das ressalvas.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: