Industrial Policy and Productivity in China: Two Sides of the Same Coin

Using a comprehensive dataset of all medium and large enterprises in China between 2001 and 2007, we show that industrial policies plays contradictory role in China's economic growth: it significantly improve productivity at firm level, but has no significant or even negative effect on city-sector productivity. Further investigation shows that apparent paradox comes from the different influence of industrial policies on new entrants and existing firms: they attract more new firms with lower productivity, which offset the positive effect on existing firms. Furthermore, we find heterogeneous effects of industrial policies across different areas: core areas benefit from the better new entrants, while periphery suffer from the worse ones.