Selective industrial policy and capital misallocation: evidence from the ‘Revitalization Plan for Ten Industries’ in China

Abstract

Capital misallocation is a main obstacle to China’s economic development. This paper deploys a quasi-natural experiment formed by the ‘Revitalization Plan for Ten Industries’ (RPTI) and examines the impacts that selective industrial policies have on capital misallocation. It is found that the RPTI significantly exacerbates capital misallocation and that the effect does not disappear when the RPTI ends. Mechanism analysis indicates that the RPTI significantly increases the capital productivity of firm groups with high capital productivity but significantly reduces the capital productivity of firm groups with low capital productivity. This can be further interpreted by a decrease or an increase of inefficient investment and financial constraints faced by the corresponding firm groups. The documented relationship is stronger in state-owned enterprises and in firms located in areas of high marketization. Our findings advance the understanding of governmental policy intervention in developing countries.

Keywords:

• Industrial policy
• selective industrial policy
• capital misallocation
• Revitalization Plan for Ten Industries (RPTI)
• capital productivity

Jel codes:

• P34
• O21

Disclosure statement

No potential conflict of interest was provided by the authors.

Additional information

Funding

Humanities and Social Science Foundation of Ministry of Education of China 20YJC790029 the Scientific Research Project of Education Department of Shaanxi Provincial Government 20JT065 China Postdoctoral Science Foundation 10.13039/5011000028582020M683690XB. The authors gratefully acknowledge financial supports provided by the Humanities and Social Science Foundation of Ministry of Education of China under Grant No. 20YJC790029; the Scientific Research Project of Education Department of Shaanxi Provincial Government under Grant No. 20JT065; and China Postdoctoral Science Foundation under Grant No. 2020M683690XB.

Notes on contributors

Xiulu Huang

Dr. Xiulu Huang is an associate professor in School of Public Administration at Xi’an University of Architecture and Technology. She received her doctoral degree in economics from Xi’an Jiaotong University. Her current interests center on systemic risk, macroprudential regulation, policy evaluation, and economic growth.

Pengfei Ge

Dr. Pengfei Ge is an associate professor in finance at Northwest University. He received his doctoral degree in economics from School of Economics and Management, Northwest University. He mainly focuses on industrial capacity, capital misallocation, and financial development.

Bole Zhou

Bole Zhou is a PhD candidate in School of Economics and Management, Northwest University. His research concentrates on corporate investment, corporate financialization, and policy evaluation.