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Who wins and who loses from state subsidies?

Author

Listed:
  • Jun Du
  • Sourafel Girma
  • Holger Görg
  • Ignat Stepanok
Abstract
China is perceived to rely on subsidizing firms in targeted industries to improve their performance and stay competitive. We implement an approach that allows for the joint estimation of direct and indirect effects of subsidies on subsidized and non‐subsidized firms. We find that firms that receive subsidies experience a boost in productivity. However, our approach highlights the importance of indirect effects, which are generally neglected in the literature. We find that, in general but not always, non‐subsidized firms experience reductions in their productivity growth if they operate in a cluster where other firms are subsidized. These negative externalities depend on the share of firms that receive subsidies in the cluster. Aggregating direct and indirect effects into a (weighted) total effect shows that this negative indirect effect tends to dominate. We interpret our results in light of a simple heterogenous firm model, which highlights that subsidization in a competitive environment of firms may potentially harm non‐subsidized firms. La Chine est perçue comme comptant sur les subventions aux entreprises dans des industries ciblées pour améliorer leurs performances et rester compétitives. Nous mettons en œuvre une approche qui permet l'estimation conjointe des effets directs et indirects des subventions sur les entreprises subventionnées et non subventionnées. Nous constatons que les entreprises qui reçoivent des subventions voient leur productivité augmenter. Cependant, notre approche souligne l'importance des effets indirects, qui sont généralement négligés dans la littérature. Nous constatons qu'en général, mais pas toujours, les entreprises non subventionnées voient la croissance de leur productivité diminuer si elles opèrent dans un cluster où d'autres entreprises sont subventionnées. Ces externalités négatives dépendent de la part des entreprises qui reçoivent des subventions dans le cluster. L'agrégation des effets directs et indirects en un effet total (pondéré) montre que cet effet indirect négatif tend à dominer. Nous interprétons nos résultats à la lumière d'un modèle simple d'entreprise hétérogène, qui souligne que les subventions, dans un environnement concurrentiel d'entreprises, peuvent potentiellement nuire aux entreprises non subventionnées.

Suggested Citation

  • Jun Du & Sourafel Girma & Holger Görg & Ignat Stepanok, 2023. "Who wins and who loses from state subsidies?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 1007-1031, August.
    • Handle: RePEc:wly:canjec:v:56:y:2023:i:3:p:1007-1031
    DOI: 10.1111/caje.12644
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    1. Li, Guangwei & Branstetter, Lee G., 2024. "Does “Made in China 2025” work for China? Evidence from Chinese listed firms," Research Policy, Elsevier, vol. 53(6).

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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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