Thanks to Scott Lincicom for alerting me This is a new study of China’s industrial policy. Here is the text:
Relatively mild government failure – for example, bureaucrats can be counted but not distinguished – can seriously affect the effectiveness of industrial policy. We examine this proposition using a structural model in the context of China’s largest pro-innovation industrial policy. We find that the return to the subsidy program is -19.7% (but 7.8% if mild government failure can be excluded). Furthermore, the loss of welfare is exacerbated by patent trade.
And here are some of the highlights of this paper, to me and a few others via e-mail from Scott:
- “In particular, the policy shock of 2008 caused initially non-innovative firms – those with fewer than six patents – to rush to obtain the patents required for subsidy applications in target industries. Moreover, an increasing share of new patents owned by them appear to be of low quality.”
- “In the selected industries, patents initially sold to small, innovative firms showed rapid growth after 2008. This is particularly true for patents sold by firms outside the target industries, those that could not afford subsidies anyway, or those in the target industries that had more than six patents prior to the policy shock. Existing companies do not need to apply for grants.
- “After adjusting the model to the data, although the subsidy led to a 33% increase in patents, 98% of the increase was of low quality. This indicates a significant decrease in the average quality of new patents.”
- “Comparing the welfare levels in the model with the subsidy program, we estimate a net social return to the subsidy of -19.7%. That is, society would be better off without the subsidy program,” he said.
- “Even mild government failure can turn an otherwise well-established industrial policy from success to failure… While we focus here on mild government failure, we do not, of course, rule out strong or semi-strong government failure in practice. If corruption, lobbying, or incompetence were included in our model, the returns to the subsidy program would be much smaller (ie, more negative). “
DBXOn pages 36-37 of their paper, the authors rightly note that avoiding even mild government failure is “not realistic.”
And to those who worry that China is ‘unfairly competing’ economically with America using industrial policy, I say, you are right! But the injustice is not for Americans (Beijing’s intervention will make our economy stronger Relative China’s economy), but unfair to the Chinese people.
