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The causal effects of an industrial policy

Author

Listed:
  • Criscuolo, Chiara
  • Martin, Ralf
  • Overman, Henry G.
  • Van Reenen, John
Abstract
Business support policies designed to raise employment and productivity are ubiquitous around the world. We exploit changes in the area-specific eligibility criteria for a major program to support jobs through investment subsidies. Pan-European state aid rules determine whether a sub-national geographical area is eligible for subsidies, and we construct instrumental variables for area (and plant) eligibility based on the estimated parameters of these rule changes. We find areas eligible for business support create significantly more jobs (and reduce unemployment), and this is not due to job displacement between eligible and ineligible areas. An exogenous ten-percentage point increase in an area’s maximum investment subsidy stimulates about a 7% increase in manufacturing employment. The treatment effect exists solely for small firms – large companies appear to “game” the system, accepting subsidies without increasing activity. There are positive effects on net entry of new plants, firm investment but no effects on Total Factor Productivity.

Suggested Citation

  • Criscuolo, Chiara & Martin, Ralf & Overman, Henry G. & Van Reenen, John, 2016. "The causal effects of an industrial policy," LSE Research Online Documents on Economics 58575, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:58575
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    References listed on IDEAS

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    More about this item

    Keywords

    industrial policy; regional policy; employment; investment; productivity;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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