The Causal Effects of an Industrial Policy

56 Pages Posted: 1 Mar 2012

See all articles by Chiara Criscuolo

Chiara Criscuolo

Organization for Economic Co-Operation and Development (OECD)

Ralf Martin

Imperial College London

Henry G. Overman

London School of Economics (LSE) - Department of Geography and Environment; Centre for Economic Policy Research (CEPR)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Date Written: February 2012

Abstract

Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs ('Regional Selective Assistance'). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that 'cost per job' of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.

Keywords: employment, industrial policy, investment, productivity, regional policy

JEL Classification: H25, L52, L53, O47

Suggested Citation

Criscuolo, Chiara and Martin, Ralf and Overman, Henry G. and Van Reenen, John Michael, The Causal Effects of an Industrial Policy (February 2012). CEPR Discussion Paper No. DP8818. Available at SSRN: https://ssrn.com/abstract=2013809

Chiara Criscuolo

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Ralf Martin

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Henry G. Overman

London School of Economics (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 20 7955 6581 (Phone)
+44 20 7955 7412 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6976 (Phone)
+44 20 7955 6848 (Fax)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7240 6740 (Phone)
+44 20 7240 6136 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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