Industrial Policies and Firm Performance: A Nuanced Relationship

Rafael Machado Parente, Sandra Baquie, Yueling Huang, Florence Jaumotte, Jaden Kim and Samuel Pienknagura

No 2025/143, IMF Working Papers from International Monetary Fund

Abstract: This paper empirically studies the relationship between industrial policies (IPs) and firm performance, showing it varies by instrument, firm and industry characteristics, value chain position, and time horizon. Consistent with the trade literature, IPs reducing trade barriers are linked to medium term improvements in firm performance. Subsidies discriminating against foreign interests are linked to short term improvements in value added (VA), productivity and payroll, which fade or turn negative in the medium term. Export incentives are linked to short term declines in firm performance followed by medium term gains. These relationships are stronger for young and financially constrained firms compared to older and less financially constrained firms. Industry distortions also matter—IPs are linked to stronger improvements in VA, capital and payroll in the short term when distortions are high. Finally, we find cross-sectoral spillovers: protective IPs targeting upstream sectors are associated with improved outcomes in downstream firms, while those targeting downstream sectors correlate with weaker upstream performance. Cross-sectoral spillovers from trade liberalizing policies are consistently positive and larger in magnitude, regardless of value chain position.

Keywords: Industrial Policies; Firm Performance; Subsidies; Export Incentives; Productivity; protectionist export incentive; industry distortion; constrained firm; liberalizing trade barriers; Export subsidies; Trade barriers; Total factor productivity; Global (search for similar items in EconPapers)
Pages: 57
Date: 2025-07-18
New Economics Papers: this item is included in nep-eff
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