How does China’s industrial policy affect firms’ R&D investment? Evidence from ‘Made in China 2025’

ABSTRACT

Aimed at improving innovation capacity and upgrading technology of manufacturing industry, ‘Made in China 2025’ (CM2025), which relies on selective industrial policies, has attracted great attention. This paper investigates the effects of CM2025 on firms’ R&D investment using CEM-DID, a combination method based on the coarsened exact matching and the difference-in-difference. The method can effectively identify causal relationships without suffering from selection bias. Employing a panel data of 1,440 Chinese A-share listed firms from 2012 to 2018, we find firms with core business covered by the areas of CM2025 increase their R&D investment significantly after the policy intervention. Moreover, CM2025 significantly increases government subsidies and financial loans for treated firms, and both effects are larger for SOEs. This finding supports the critique that CM2025 goes against the competitive neutrality principle. No increase in innovation output and total factor productivity is found in the short-term. Our findings are enlightening for enacting better industrial policies.

KEYWORDS:

• Industrial policy
• R&D investment
• Coarsened exact matching
• Difference-in-difference
• Made in China 2025

JEL CLASSIFICATION:

• H20
• O30
• O38

Acknowledgments

We acknowledge the financial support from the Ministry of Education of Humanities and Social Sciences Project of China (Grant No. 18YJC790232), the National Natural Science Foundation of China (Grant No. 71,803,055), China Postdoctoral Science Foundation (Grant No. 2017M620306), Jiangxi Natural Science Fund Management Science Project (2018BAA208004), and Jiangxi Humanities and Social Sciences Key Research Base Project of University (JD18016).

Disclosure statement

No potential conflict of interest was reported by the authors.

Highlights

• We identify the positive treatment effects of CM2025 on firms’ R&D investment.

• CEM-DID method is used, which identifies causal relations without confounding bias.

• CM2025 increases government subsidies and financial loans for treated firms.

• The treatment effect of CM2025 is significantly larger on SOEs than Non-SOEs.

• No increase in innovation output and productivity is found in the short-term.

Additional information

Funding

This work was supported by the China Postdoctoral Science Foundation [2017M620306];National Natural Science Foundation of China [71803055];Ministry of Education of Humanities and Social Sciences Project of China [18YJC790232];Jiangxi Humanities and Social Sciences Key Research Base Project of University [JD18016];Jiangxi Natural Science Fund Management Science Project [2018BAA208004].