How uncertainty in industry policy affects corporate investment in China

Abstract

In this paper, we investigate the link between uncertainty in industrial policy and firm investment by focusing on China's five-year plan (FYP). Our sample period is from 1998 to 2017. In our investigation, we examine whether a change in the FYP is a source of uncertainty in industrial policy because of the difficulties in FYP predictability. Our main finding is that there are systematic decreases in investments in the year prior to a new FYP. The finding is robust to endogeneity. We also find that the relation between the uncertainty in industrial policy and investment is heterogeneous in the cross section. This heterogeneity is caused by information advantages about new FYP, dependence on government subsidies, investment irreversibility and industry competition. Further, investment rebounds after resolving the uncertainty but are dampened by adjustment costs.

Effects of Industrial Policy on Firms’ Innovation Outputs: Evidence From China

“…Prior studies focus on the valuation impact of industrial policy (Barbieri, Di Tommaso et al, 2021; Calder, 1995; Chang et al, 1998; Chen, Li et al, 2017; Eaton & Grossman, 1986; Etzkowitz & Leydesdorff, 2000; Rodrik, 2004). Five-Year Plans are increasingly used to measure industrial policy for China and is proven to play positive roles in firm financing (Deloof et al, 2022; Chen, Li et al, 2017), foreign direct investment (Li et al, 2022), productivity (Chen, Feng et al, 2022; Chen, Liu, Suárez Serrato, et al, 2021), and corporate tax avoidance (Geng et al, 2021). The significant positive effects of industrial policy on firm innovation activities indicating industrial policy can help alleviate the negative externalities in carrying out innovation activities for firms (Schumpeter, 1934) and somewhat overcome market failure.…”

“…Prior studies focus on the valuation impact of industrial policy (Barbieri, Di Tommaso et al, 2021;Calder, 1995;Chang et al, 1998;Chen, Li et al, 2017;Eaton & Grossman, 1986;Etzkowitz & Leydesdorff, 2000;Rodrik, 2004). Five-Year Plans are increasingly used to measure industrial policy for China and is proven to play positive roles in firm financing (Deloof et al, 2022;Chen, Li et al, 2017), foreign direct investment (Li et al, 2022), productivity (Chen, Feng et al, 2022; Note. The estimation method of Column ( 4) is fixed effect model, the numbers in parentheses are t statistics.…”