This paper examines an important industrial policy in China in the 2000s that aims 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.
Industrial policy, broadly defined as a policy agenda that shapes a country's or region's industrial structure by either promoting or restricting specific sectors, has been widely used in developed and developing countries. Historic examples of this kind of policy agenda include the U.S. and Europe after World War II, Japan in the 1950s and 1960s, and South Korea and Taiwan in the 1960s and 1970s. Today, industrial policy in the form of protectionism is once again at the forefront of economic policy in both the East and the West. As Rodrik (2010) proposes, “The real question about industrial policy is not whether it should be practiced, but how.”
Despite the prevalence of industrial policy in practice and the contentious debate in the literature regarding its efficacy (Baldwin, 1969; Krueger, 1990), remarkably few empirical studies directly evaluate the costs and benefits of these policies. Our recent paper (Barwick, Kalouptsidi, and Zahur, 2019) addresses this issue, with a focus on China, where the regulatory agency has considerable influence over industry. During roughly the past two decades, Chinese firms have rapidly dominated many global industries, such as steel, automotive, and solar panels (Figure 1). In recent years, the government has explicitly targeted high-tech sectors in an attempt to turn their firms into world leaders (“Made in China 2025 ”).
Our paper treats the shipbuilding industry as a case study. At the turn of the century, China’s nascent shipbuilding industry accounted for less than 10 percent of world production. The country’s 11th (2006–2010) and 12th (2011–2015) National Five-Year Plans dubbed shipbuilding a pillar industry in need of special oversight and support. Since then, the government issued an unprecedented number of national policies to develop this infant industry into the largest worldwide. The policies set specific goals for output and capacity and, as such, involved a mix of production, investment, and firm entry subsidies. (We discuss the possible motivations for these policies at the end of this article.) Production subsidies included input material and export credits, and buyer financing, among others. Investment subsidies took the form of low-interest, long-term loans and expedited capital depreciation. Finally, reduced processing time and simplified licensing procedures, as well as heavily subsidized land prices, significantly lowered the cost of entry for potential shipyards. Within a few years, China overtook Japan and South Korea as the leading ship producer in terms of output. Figures 2 and 3 depict the industry’s rapid expansion. In the aftermath of the 2008 financial crisis and amidst a sharp decline in global ship prices, the government then promoted consolidation policies to create large, successful firms that can compete against international conglomerates.
Treating this historical event as a case study, we examine the consequences of industrial policies and focus on three questions: First, how has China’s industrial policy shaped its domestic and the global industry? Second, what are the costs and benefits of this policy? Third, what is the relative efficacy of various policy instruments, such as production subsidies, investment subsidies, entry subsidies, and consolidation policies?
Note 1: See for an example, Chuin-Wei Yap and Paul Mozur, “China Aims to Create Electronics Giants,” Wall Street Journal, Jan. 22 2013. Accessed September 6, 2019, at https://www.wsj.com/articles/SB10001424127887324624404578257351843112188
(Barwick，Department of Economics, Cornell University and NBER; Kalouptsidi, Department of Economics, Harvard University and NBER; Zahur,Department of Economics, Cornell University.)
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Barwick, Panle Jia, Myrto Kalouptsidi, and Nahim Zahur. 2019. “China’s Industrial Policy: An Empirical Evaluation.” NBER working paper 26075, July. URL: https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxteXJ0b2thbG91cHxneDo2OTI4OWM2YTdjYjJhNzVh
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Yap, Chuin-Wei, and Paul Mozur. 2013. “China Aims to Create Electronics Giants.” Wall Street Journal, Jan. 22 2013. URL: https://www.wsj.com/articles/SB10001424127887324624404578257351843112188