Does Industrial Policy Reduce Corporate Investment Efficiency? Evidence from China

Abstract

We investigate the impact and mechanism of industrial policy on corporate investment and investment efficiency. Using the micro-level data of A-share listed firms on China’s stock market from 2001–2020, we examine whether industrial policies have different effects on China’s state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs). Moreover, we identify specific policy followers to further illustrate the impact of industrial policy on investment efficiency. The empirical results show that industrial policies promote investments among non-SOEs at the cost of reducing their investment efficiency, but have no effect on the investment and efficiency of SOEs. Government subsidy and inter-industry competition are the main mechanisms for the negative impact of industrial policy on investment efficiency. Moreover, target industrial policies reduce the investment efficiency of both SOE and non-SOE policy followers. Therefore, to achieve the goal of improving corporate investment efficiency and promoting sustainable economic development, policy-makers should pay more attention to the consequence of unnecessary government subsidy and excessive inter-industry competition.