The effect of industrial policy on corporate performance: Evidence from panel data

(joint with Chiara Criscuolo, Henry Overman and John van Reenen)
Abstract: Industrial or business support policies designed to raise productivity and
employment are a common feature of the policy landscape. Despite this ubiquity, rigorous micro-econometric evaluation of their causal effect is rare primarily because of the difficulty of achieving credible identification. In this paper we tackle this problem by exploiting multiple changes in the area-specific eligibility criteria for a major business support scheme in the UK (“Regional Selective Assistance”). These changes arose because of the need to comply with the European Commission revisions of the eligibility criteria and coverage rules. We match over twenty years of administrative panel data on program participation and firm performance from the Census Bureau to investigate the causal impact of the policy on employment, investment, productivity and entry/exit. Using an instrumental variable approach we find that the program has had a positive effect on both employment and investment, which naïve estimators underestimate. There is no statistically significant effect on total factor productivity, however. There is also some evidence that the program, by supporting less efficient enterprises, may slow down reallocation from less efficient plants, negatively affecting aggregate productivity growth.