Industrial Policy and Competition

Using a comprehensive dataset of all medium and large enter-prises in China between 1998 and 2007, we show that industrial policies allocated to competitive sectors or that foster competition in a sector increase productivity growth. We measure competition using the Lerner Index and include as industrial policies subsidies, tax holidays, loans, and tariffs. Measures to foster competition include policies that are more dispersed across firms in a sector or measures that encourage younger and more productive enter-prises. In the aftermath of World War II, several developing countries opted for “in-dustrial policies ” aimed at promoting new infant industries or at protecting local traditional activities from competition by products from more advanced coun-tries. However, these policies came into disrepute in the 1980s mainly on the ground that industrial policy prevents competition and allows governments to pick winners (and, more rarely, to name losers) in a discretionary fashion, thereb