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The Causal Effects of an Industrial Policy

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The Causal Effects of an Industrial Policy A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Criscuolo, Chiara; Martin, Ralf; Overman, Henry; Van Reenen, John Working Paper The causal effects of an industrial policy IZA Discussion Papers, No. 6323 Provided in Cooperation with: IZA – Institute of Labor Economics Suggested Citation: Criscuolo, Chiara; Martin, Ralf; Overman, Henry; Van Reenen, John (2012) : The causal effects of an industrial policy, IZA Discussion Papers, No. 6323, Institute for the Study of Labor (IZA), Bonn, http://nbn-resolving.de/urn:nbn:de:101:1-2012042310733 This Version is available at: http://hdl.handle.net/10419/58457 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu IZA DP No. 6323 The Causal Effects of an Industrial Policy Chiara Criscuolo Ralf Martin Henry Overman John Van Reenen January 2012 DISCUSSION PAPER SERIES Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor The Causal Effects of an Industrial Policy Chiara Criscuolo OECD and CEP Ralf Martin Imperial College and CEP Henry Overman London School of Economics, Spatial Economics Research Centre, CEP and CEPR John Van Reenen CEP, London School of Economics, NBER, CEPR and IZA Discussion Paper No. 6323 January 2012 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: [email protected] Any opinions expressed here are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 6323 January 2012 ABSTRACT The Causal Effects of an Industrial Policy* 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. JEL Classification: H25, L52, L53, O47 Keywords: industrial policy, regional policy, employment, investment, productivity Corresponding author: John Van Reenen Centre for Economic Performance, LSE Houghton Street London, WC1E 2AE United Kingdom E-mail: [email protected] * Helpful comments have come from seminar participants in Berkeley, Essex, HECER, Helsinki, LSE, Lausanne, NARSC, NBER, NIESR, Paris, Stanford and Stockholm. Financial support is from the British Academy and ESRC through the CEP and SERC. We would like to thank the Department of Business and Innovation for data access and Paul David, Fernando Galindo-Rueda, Pete Klenow, Enrico Moretti, Beatrice Parrish, Marjorie Roome, David Southworth and Alex Wilson, and for useful insights. The ONS Virtual Microdata Lab ensured access to ONS Data, Alberta Criscuolo helped with the EU legislation and Mehtap Polat provided excellent research assistance. Errors in use of these data are our own. This work contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen’s Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. INTRODUCTION The Great Recession has brought industrial policy back into fashion. Huge subsidies have been granted by governments around the world to private firms most dramatically in financial services, but also in other sectors like autos. For example, the European Union (EU) countries spent €1.18 trillion on state aid in 2010, 9.6% of its GDP (European Commission, 2011). But business support policies are not new – most governments grant investment subsidies that claim to foster employment and productivity, particularly in disadvantaged areas. In 2010, €61bn was spent by EU countries on aid that was unrelated to the financial crisis. The US spends around $40-$50bn per annum on local development policies (Moretti, 2011). Despite the ubiquity and cost of such schemes, rigorous micro-econometric evaluations of the causal effect of these “industrial policies”1 are rare. The basic evaluation problem is that government programs might simply finance activities that firms would have undertaken in absence of the industrial policy. If this is the case, large amounts of taxpayer dollars could simply be wasted, even before we take into account the deadweight costs of taxation and other distortions induced by program design. The consensual view among economists is that industrial policy is a failure, but the econometric basis for this conclusion is hardly overwhelming. As Rodrik (2007) emphasises many of these policies are targeted on firms and industries that would be in difficulties in the absence of the program, so the coefficient on subsidy receipt in an OLS regression with (say) jobs as the dependent variable is likely to be heavily downwards biased.2 The main factor holding back credible evaluations of industrial policies is the absence of a clear identification strategy. We tackle this problem by exploiting a quasi-experiment that induced exogenous changes in the eligibility criteria governing the receipt of investment subsidies, which gave grants to firms for investment in economically disadvantaged areas of Britain (“Regional Selective Assistance” or RSA). Crucially for our identification strategy, there are strict rules governing the geographical areas that are eligible to receive aid from the British government determined by the European Union (EU). This is different from the US where the Federal government cannot prevent states from offering such business inducements (see Felix and Hines, 2011, for a discussion of US local incentives). These are common, formula-driven EU-wide rules that changed in 1993 and in 2000. We exploit the change in these “maps of 1 “Industrial policy” means different things to different people. We are using it simply as a policy which directs investment subsidies to private sector firms. In our context, these subsidies are a government strategy to revitalize depressed geographical areas. 2 For examples see Krueger and Tuncer (1982), Harrison (1994), Beason and Weinstein (1996) and Lawrence and Weinstein (2001). 1 assistance” to generate instrumental variables for the receipt of investment grants. This enables us to estimate the causal effect of the program on employment, investment, productivity and plant numbers (reflecting exit and entry). Our data set
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