Industrial Policy and Competition: Antinomian or Complementary?

Transcription

1 0 Industrial Policy and Competition: Antinomian or Complementary? P. Aghion, M. Dewatripont, L.Du A. Harrison, P. Legros December 30, 2010 P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

2 Introduction (1) In aftermath of WWII, many developing countries have opted for trade protection and import substitution policies aimed at promoting new infant industries Over time, and particularly since the 1980s, economists have come to dislike industrial policy on two grounds: it focuses on big incumbents ( national champions); governments are not great in picking winners. Current dominant view is that industrial policy and competition policy are always contradictory a view we take issue with in this paper P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

3 Introduction (2) Why sectoral policy may complement, rather than necessarily destroy, competition 1 competition weeds out bad projects, thus reduces danger of picking the wrong winner 2 sectoral focus preserves competition among firms that would otherwise differentiate horizontally In particular the more intense product market competition within sectors, and/or the less concentrated government subsidies within a vsector, the more innovation-enhancing sectoral focus should be P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

4 Introduction (3) Why not let the market decide whether or not to focus? How does the answer to the above question depend upon Government s (lack of) information relative the firms information? P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

5 Outline 1 Model 2 Empirical analysis 3 Conclusions P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

6 Model (1) Two consumption goods A, B Representative consumer has income 2E and utility U(x A, x B ) = log(x A ) + log(x B ). Thus consumers spend E on each good A and B and x i = E /p i. P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

7 Model (2) Two potential innovators j = 1, 2 Production can be carried out by one of these two firms 1, 2 or by fringe firms. Fringe firms act competitively and have marginal cost c f while firms j = 1, 2 have initial marginal cost c, where E > c f > c P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

8 Model (3) Each firm has probability 1/2 to be selected as innovator Costs q 2 /2 to innovate with probability q If innovates on technology k = A, B, unit cost is reduced down to c/γ k where γ A = γ + δ, γ B = γ δ P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

9 Model (4) Laissez-faire 1 Firms choose where to locate: A or B If they choose same product: focus If they choose different products: diversify 2 Then, firms compete in price Targeting as industrial policy a planner may decide to implement targeting, i.e to force firms to focus on A or B P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

10 Equilibrium price Bertrand competition: the price is equal to the second lowest unit cost Under diversity: p = c f Under focus: p = c P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

11 Equilibrium innovation intensity under diversity If firm on technology i is chosen to be an innovator it will get a profit margin of c f c γ if it innovates and a profit i margin of c f c if it does not hence this firm will choose innovation intensity q to maximize ) π = q (c f cγi x i + (1 q)(c f c)x i 1 2 q2 where x i = E /c f Thus q D i = γ i 1 γ i c E c f P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

12 Equilibrium innovation intensity under focus If firms decide to locate on the same technology, it is optimal for them to choose technology with highest γ i, namely γ i = γ A = γ + δ. If firm j has the opportunity to innovate gets a profit margin of c c γ if it innovates and a profit margin A of zero if it does not innovate hence this firm will choose innovation intensity q to maximize ( π = q c c ) x A + (1 q).0 1 γ A 2 q2 where x A = E /c Thus q F = γ A 1 E γ A P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

13 Competition and innovation under diversity versus focus (1) Comparing between innovation under diversity and innovation under focus, we have q F > q D i, i = A, B. Intuition: tighter competition under focus induces firms to innovate more in order to escape competition P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

14 Competition and innovation under diversity versus focus (2) P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

15 Competition and innovation under diversity versus focus (2) P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

16 Competition and innovation under diversity versus focus (2) P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

17 Competition and innovation under diversity versus focus (2) P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

18 Competition and innovation under diversity versus focus (2) P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

19 Competition and innovation under diversity versus focus (3) Generalization: 1 Suppose that under focus firms with same cost c collude with probability ϕ; then 2 Thus and q F (ϕ) = [ γ A 1 γ A q F ϕ < 0 ϕ 2 (1 c c f )]E q F (ϕ) > q D i 1 1/γ A > ϕ/2 whenever ϕ is suffi ciently small or γ A = γ + δ is suffi ciently large. P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

20 Competition and innovation under diversity versus focus (4) Thus more intense competition (as inversely measured by ϕ) in a sector increases the innovation-enhancing effect of focus on that sector Sectoral policy which reduces ϕ by spreading subsidies across more firms in the sector, also increases the innovation-enhancing effects of sectoral focus P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

21 Firms decision to focus or diversify under laissez-faire (1) Assume perfect competition under focus, i.e ϕ = 0 Equilibrium expected profit for firm in low-tech sector under diversity regime: Π γ δ (δ) = 1 ( ) γ δ 1 2 ( ) c 2 E 2 + c f c E 4 γ δ Equilibrium profit for firms under focus c f ( ) γ + δ 1 2 E 2 c f π F (δ) = 1 4 γ + δ P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

22 Firms decision to focus or diversify under laissez-faire (2) Thus firms will diversify whenever c f c 1 ( ) c }{{ f 4 E γ + δ 1 2 ( ) γ δ 1 2 ( ) c 2 γ + δ γ δ c }}{{ f } where LHS is loss from more intense competition under focus, RHS is loss in innovation intensity and size under diversity Thus: Proposition There exists a unique cutoff value δ L such that diversity is chosen under laissez-faire if, and only if, δ δ L. In particular for δ < δ L, firms choose to diversify under laissez-faire even though focus would enhance innovation.. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

23 Social optimum and the case for targeting (1) Focus leads to a lower consumer price (c instead of c f ) and it also increases the probability of cost reduction Because firms do not internalize the loss in consumer surplus, they tend to diversify too often In dynamic extension, firms also do not internalize knowledge externalities which also induces them to diversify too often P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

24 Social optimum and the case for targeting (2) We establish: Proposition 1 There exists δ S < δ L such that targeting is socially optimal if, and only if, δ is greater than δ S. 2 Letting g = γ 1 γ, δs = 0 when g c c f +c. 3 When g < c c f +c, there exist E 0, E 1 with E 0 < E 1 such that δ S > 0 only if the market size E [E 0, E 1 ]; for E < E 0 or E > E 1, δ S = 0. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

25 Social optimum and the case for targeting (3) In particular: 1 With perfect information, targeting is always an optimal policy for high growth rates in this case, laissez-faire conflicts with social optimum for all values of δ less than δ L 2 However, targeting is an optimal policy for smaller growth rates only if the market size is neither too small nor too big : a planner would also choose diversity for δ < δ S and therefore there is a conflict between laissez-faire and social optimal for δ (δ S, δ L ). P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

26 Growth and dynamic welfare under focus versus diversity (1) Dynamic extension of the model where social planner seeks to maximize 1 U = ( 1 + r )t [log xt A + log xt B ], t=1 Private consumers and entrepreneurs live for one period only. Assume that, due to knowledge spillovers, after one period all firms multiply their initial productivity by the same γ {γ + δ, γ δ} as the innovative firm. Then a social planner who wants to maximize intertemporal utility, will take into account not only the static welfare analyzed above, but also the average growth rates respectively under diversity and under focus. P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

27 Growth and dynamic welfare under focus versus diversity (2) The growth rates of utility under diversity and focus respectively: G D = [ 1 2 (1 1 γ + δ ) log(γ + δ) (1 1 γ δ ) log(γ δ)] c c f E and We clearly have G F = (1 1 ) log(γ + δ)e. γ + δ G F > G D. P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

28 Growth and dynamic welfare under focus versus diversity (3) Intuition: 1 focus increases the expected size of innovation (always equal to log(γ + δ) under focus, but sometimes equal to log(γ δ) under diversity); 2 focus increases the expected frequency of innovation both because innovation under focus induces bigger cost reduction under focus (under diversity cost is sometimes reduced by factor (γ δ)) and because under focus there is more incentive to innovate in order to escape competition (term c c f in the expression for G D ). P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

29 Growth and dynamic welfare under focus versus diversity (3) The above discussion establishes: Proposition There exists a cut-off value δ S (r) < δ S, increasing in r, such that focus maximizes dynamic welfare whenever δ > δ S (r).. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

30 Imperfect information about technologies Suppose nobody knows which is Sector A with higher innovation size Then firms will always choose to diversify under laissez-faire since a firm under diversity could have chosen to set the same price and use the same innovation intensity as under focus in the same sector Yet one can show that the social planner will still value focus (i.e will want to target) for δ not too high targeting involves the possibility of "picking the wrong winner" at the same time, targeting stimulates innovation the latter dominates when γ is suffi ciently high, δ is not too high, and competition between firms with same cost in same sector is suffi ciently intense P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

31 Main predictions Targeting is more growth and welfare enhancing 1 the larger the growth potential of the sector 2 the more intense competition within the sector 3 the competition is preserved by sectoral policy P. Aghion, M. Dewatripont, L.Du, A. Harrison, Industrial P. Legros Policy () and Competition: Antinomian or Complementary? December 30, / 31

32 How can we evaluate whether the theory is consistent with the evidence? Limited tests of industrial policy success or failure No existing evidence linking how industrial policy is designed with likelihood of success Theory suggests that targeting is more growth enhancing when there is more intense competition within a sector Need measures of welfare or growth, targeting and competition Outcome measure: total factor productivity levels, growth rates, and rate of new product introduction Targeting measure: subsidies to Chinese firms Competition measure: Lerner index P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

33 Definition of Key Variables Subsidy: for a firm, this is the subsidy received by a firm as a share of industrial sales. Subsidy is our measure of targeting COMP: sector-level measure of competition. A value of 1 indicates perfect competition while values below 1 suggest some degree of market power. To calculate industry-level lerner index, we first aggregate operating profits, capital cost, and sales at the industry-level. Lerner index = (operating profits capital costs)/sales. COMP = 1-Lerner Index InvSubsidyHerf: measures sectoral dispersion of subsidies. We construct a Herfindahl index using the share of subsidies a firm obtains to the total subsidies awarded to one industry. InvSubsidyHerf is 1/Herf_subsidy, where _ Subsidy _ ijt Herf subsidy jt i j Sum subsidy jt 2 P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

34 TFP Estimation: Testing for the Impact of Interventions in China in conjunction with Competition ln TFP ijt Z ijt S SUBSIDY * COMP jt jt SUBSIDY i 3 t ijt ijt COMP 4 jt Z=Vector of firm-level controls, including state and foreign ownership S=Vector of sector-level controls, including input and output tariffs, sectoral foreign shares. All specifications allow for firm fixed effects and time effects. Three Approaches: OLS, OLS with fixed effects, Olley-Pakes approach to measuring TFP in first stage Critical question: Are productivity gains from subsidies higher with competition? If so, coefficient B5 > 0 P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

35 Dataset Industrial firms from NBS: annual survey of all enterprises with more than 5 million RMB sales Annual data for 1988 through 2007 Information on outputs and inputs, ownership Firm-specific reporting on subsidies Firm identifiers enable us to control for firmspecific fixed effects P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

36 Results: Dependent Variable is log of Total Factor Productivity (TFP) calculated using Olley-Pakes Table 1 (1) (2) (3) (4) (5) (6) VARIABLES lntfp (based on Olley-Pakes regression) Stateshare ( ) ( ) ( ) ( ) ( ) ( ) Horizontal 0.322*** 0.335*** 0.323*** 0.335*** 0.178* 0.198* (0.0756) (0.0793) (0.0755) (0.0793) (0.0947) (0.101) Ratio_subsidy *** *** *** *** *** *** (0.0279) (0.0276) (1.769) (1.404) (1.748) (1.392) Competition_lerner (0.533) (0.535) (0.535) Interaction_lerner 8.212*** 6.724*** 8.074*** 6.773*** (1.818) (1.441) (1.796) (1.429) Backward 0.779*** 0.762*** (0.278) (0.273) Forward (0.0991) (0.0990) LnTariff ** ** ** ** (0.0162) (0.0166) (0.0162) (0.0166) (0.0214) (0.0213) LnbwTariff (0.0174) (0.0172) (0.0174) (0.0172) (0.0194) (0.0189) LnfwTariff ( ) ( ) ( ) ( ) ( ) ( ) Constant 1.726*** 1.213** 1.725*** 1.242** 1.699*** 1.274** (0.0315) (0.534) (0.0314) (0.535) (0.0412) (0.533) Observations 1,072,034 1,072,034 1,072,034 1,072,034 1,072,034 1,072,034 R-squared Notes: Robust clustered standard errors are shown in the parentheses. Firm fixed effect and time effect are included in each specification. To exclude foreign-invested and state-owned firms, we estimate the results based on the sample of domestic non-state-owned firms. P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

37 Results by degree of concentration In Table 2, we keep the same specification as in Table 1. However, we divide the sample into four groups based on the percentiles of Herf_subsidy. Table 2 compares the results from the second quartile and the fourth quartile (the fourth quartile refers to the most concentrated industries). Table 2 (1) (2) (3) (4) (5) (6) Dependent: lntfp (based on Olley and Pakes regression) The second quartile: more dispersion in subsidies Ratio_subsidy * ** *** *** *** *** (0.0962) (0.0937) (4.884) (4.037) (4.813) (4.031) Competition_lerner (1.286) (1.285) (1.308) Interaction_lerner 16.63*** 12.24*** 16.88*** 12.19*** (5.096) (4.186) (5.023) (4.178) The fourth quartile: least dispersion in subsidies (most concentrated) ratio_subsidy *** *** ** ** ** ** (0.0625) (0.0627) (3.615) (2.854) (3.710) (2.860) competition_lerner (0.981) (0.982) (1.042) interaction_lerner 9.320** 6.069** 9.107** 6.238** (3.628) (2.883) (3.727) (2.888) Horizontal Yes Yes Yes Yes Yes Yes Forward & Backward No No No No Yes Yes Tariffs Yes Yes Yes Yes Yes Yes P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

38 Explaining the magnitudes Net impact of subsidy on TFP = (lntfp)/ Subsidy =B3 + B5*Competition Table 1: the net impact of subsidies is positive only in the case of perfect competition. Evaluated at the sample means in columns (5) and (6), subsidies are associated with nearly a 20 percentage point decline in productivity. With perfect competition, B3 + B5 can be positive (columns (3) and (5)) but small. Table 2: with significant competition and broadly distributed subsidies, net impact is positive. Splitting the sample, net impact of B3 + B5 is always negative when subsidies are given to very few firms. For the second quartile, the positive effect depends on where we evaluate it. Slightly above the sample mean for the lerner measure, we find an increase in productivity of 4.74 to 5.2 percentage points in columns (3) and (5). P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

39 Direct Impact of More Widespread Dispersion of Subsidies is Positive In Table 3, we keep everything the same as Table 1 but we replaced interaction term with the InvSubsidyHerf, which is a sector-level variable. A one standard deviation increase leads to an increase in TFP of 1.4 %. Table 3 (1) (2) (3) (4) (5) (6) lntfp (based on Olley and Pakes regression) Stateshare ( ) ( ) ( ) ( ) ( ) ( ) Horizontal 0.322*** 0.343*** 0.335*** 0.343*** 0.198* 0.212** (0.0756) (0.0785) (0.0793) (0.0785) (0.101) (0.0975) Ratio_subsidy *** *** *** *** *** *** (0.0279) (0.0320) (0.0276) (0.0320) (0.0277) (0.0318) Competition_lerner (0.542) (0.533) (0.542) (0.534) (0.543) InvSubsidyHerf *** *** ** (6.24e-05) (6.24e-05) (6.49e-05) Backward 0.762*** 0.738*** (0.273) (0.274) Forward (0.0990) (0.101) LnTariff ** ** ** ** * (0.0162) (0.0155) (0.0166) (0.0155) (0.0213) (0.0202) LnbwTariff (0.0174) (0.0166) (0.0172) (0.0166) (0.0189) (0.0186) LnfwTariff ** ** ( ) ( ) ( ) ( ) ( ) ( ) Constant 1.726*** 1.311** 1.213** 1.311** 1.245** 1.337** (0.0315) (0.539) (0.534) (0.539) (0.532) (0.537) Observations 1,072,034 1,072,034 1,072,034 1,072,034 1,072,034 1,072,034 R-squared P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

40 Using TFP growth as dependent variable Table 4 follows the same specification as Table 1, but we instead use growth of lntfp as the dependent variable and first differences of the independent variables. Other results using TFP growth also consistent with Tables 2 and 3. Table 4 Stateshare (1) (2) (3) (4) (5) (6) *** *** lntfp_growth *** *** *** *** ( ) ( ) ( ) ( ) ( ) ( ) Horizontal 0.331*** 0.325*** 0.331*** 0.325*** 0.147** 0.131* (0.0583) (0.0640) (0.0583) (0.0640) (0.0647) (0.0712) Ratio_subsidy *** *** *** *** *** *** (0.0272) (0.0272) (0.950) (1.072) (0.952) (1.058) Competition_lerner (0.328) (0.330) (0.325) Interaction Lerner 2.892*** 3.246*** 2.731*** 3.258*** (0.975) (1.099) (0.976) (1.085) P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

41 Alternative Performance Measure I New product ratio is defined as the share of output value generated by new products to the total output value. Across all firms, no significant impact of subsidies. Table 7 (1) (2) (3) (4) (5) (6) Dependent Variable: Ratio_newproduct stateshare (0.0019) (0.0019) (0.0019) (0.0019) (0.0019) (0.0019) horizontal *** *** *** *** *** *** (0.0071) (0.0070) (0.0071) (0.0070) (0.0088) (0.0090) ratio_subsidy (0.0137) (0.0139) (0.543) (0.526) (0.543) (0.526) competition_lerner ** ** ** (0.0359) (0.0355) (0.0358) interaction_lerner (0.559) (0.541) (0.559) (0.541) P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

42 Alternative Performance Measure II Now we separate the sample across quartiles according to dispersion of subsidies. The positive impact is only significant when competition is high and subsidies are given to many firms. Table 8 (1) (2) (3) (4) (5) (6) Dependent Variable: Ratio_newproduct The second quartile Ratio_subsidy * ** * ** (0.0390) (0.0388) (0.821) (0.755) (0.816) (0.755) Competition_lerner (0.0789) (0.0780) (0.0720) Interaction_lerner 1.562* 1.755** 1.568* 1.744** (0.841) (0.780) (0.837) (0.780) The fourth quartile ratio_subsidy (0.0351) (0.0352) (1.475) (1.442) (1.468) (1.432) competition_lerner 0.117* 0.114* 0.122* (0.0662) (0.0657) (0.0622) interaction_lerner (1.503) (1.470) (1.495) (1.460) P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

43 Explaining the magnitudes in Table 8 Net impact of subsidy on new product introduction =B3 + B5*Competition With perfect competition, B3 + B5 is equal to.065 when subsidies are broadly distributed, indicating an increase in the share of new products of 6.5 percent of total sales. P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

44 Summarizing Results Targeting has more positive effects on productivity when associated with greater competition Targeting has more positive effects on innovation as measured by the share of new products in sales when associated with greater competition Greater dispersion in allocation of subsidies results in improved performance P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14

45 Next Steps Controlling for selection on firm-specific subsidies (subsidies may be targeted at poor-performing firms) using propensity score matching or sectorlevel variables to measure subsidies (at sector level, results on new product introduction consistent) Introducing an exogenous driver of competition and close measure of φ : roads Exploiting variation in targeting across Chinese regions to identify the impact of subsidies across different levels of competition P. Aghion, M. Dewatripont, L. Du, A. Harrison, P. Legros Industrial Policy and Competition: Antinomia or Complementary? December 30, / 14