The Determinants and Effectiveness of Industrial Policy in China A Study Based on Five Year Plans

Industrial policy is ubiquitous in both developing and developed countries. In China, government intervention in favor of specific industries is believed to play an important role in economic development. The targeting of strategic industries for preferential treatment has been a central part of both national and provincial Five-Year Plans (FYPs). While arguments for and against industrial policy are well-known, empirical evidence regarding both the formulation and effects of such policy are scant. Our paper contributes to the literature by examining industrial policy in China over the period of four FYPs (the 9th to the 12th, running over the period 1996 to 2015). In particular, based on China’s national and provincial FYPs, this paper investigates the determinants and effectiveness of industrial policy at the four-digit manufacturing sector level. This paper finds that the central government’s preferences act as a key determinant of the provincial governments’ FYPs. High productivity does not improve an industry’s chance of selection by the provincial governments. We also show that preferential policy has a significant positive effect on industry output growth while the FYP is in effect but that there is no evidence of a beneficial effect beyond the end of the particular FYP. Keywords: Industrial Policy; Five-Year Plan; Industrial Development; Productivity