The Long-Term Effects of Industrial Policy

Jaedo Choi and Andrei Levchenko

No 29263, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper provides causal evidence on the impact of a large-scale industrial policy – South Korea’s Heavy and Chemical Industry (HCI) Drive – on firms’ long-term performance and quantifies its long-term welfare effects. Using unique historical data on the universe of firm-level subsidies and a natural experiment, we find large and persistent effects of this industrial policy. Subsidized firms grew faster than those never subsidized for 30 years after subsidies ended. We build a quantitative heterogeneous firm model that rationalizes these effects through a combination of learning-by-doing and financial frictions. The model is calibrated to firm-level data, and its key parameters are disciplined with the econometric estimates. The HCI Drive generated larger benefits than costs. If it had not been implemented, South Korea’s welfare would have been 3-4% lower. The majority of the total welfare impact comes from the long-term productivity benefits of learning-by-doing.

JEL-codes: O14 O25 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-fdg, nep-his, nep-isf and nep-tid
Note: DEV EFG IFM ITI
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Citations: View citations in EconPapers (16)

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Working Paper: The Long-Term Effects of Industrial Policy (2021)
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