Timely Policy Exit: Reducing Over-Investment and Driving High-Quality Firm Performance

• Published in: China economist (Beijing, China) Vol. 20; no. 1; pp. 55 - 76
• Main Authors: Hongwei, Dai, Lichen, Zheng
• Format: Journal Article
• Language: English
• Published: Beijing Institute of Industrial Economics, Chinese Academy of Social Sciences 01.01.2025
• Subjects: Competition; Data quality; Efficiency; Expenditures; Industrial policy; Intervention; Investments; Productivity; R&D; Research & development; Research & development expenditures; Social responsibility; Speculation; China
• DOI: 10.19602/j.chinaeconomist.2025.01.03
• ISSN: 1673-8837

Using data from the 11th to 14th Five-Year Plan periods (2006-2025), this study applies a Difference-in-Differences (DID) approach to assess the impact of industrial policy withdrawal. Industries that have faced policy withdrawal for over a decade are categorized as the treatment group, while consistently supported industries form the control group. The analysis examines how withdrawal affects firm total factor productivity (TFP) and investment behavior. The results show that policy withdrawal boosts firm TFP by reducing over-investment and improving the efficiency of R&D spending. This effect is particularly evident in industries with strong, competitive leading firms. Additionally, in regions with lower levels of marketization, timely policy withdrawal plays a key role in curbing over-investment. This study also highlights a dual effect of policy withdrawal: while it fosters corporate social responsibility, it may also encourage financial speculation. These findings suggest that the implementation of industrial policy should provide "timely assistance" over a limited timeframe rather than long-term support to well-established industries. As industries mature, policy support should be gradually reduced or phased out to avoid over-investment and enhance firm efficiency.