In this paper, we explore different patterns of industrial promotion and their association with productivity growth. We use cross-regional variation within China in the pattern of tariff or tax interventions and their correlation with initial conditions (R&D intensity, skill intensity, export intensity) to identify the impact of interventions on productivity growth. The identification strategy relies on the fact that initial conditions are predetermined, and that the city level correlation of initial endowments with time-varying tariffs should be exogenous given that tariffs are set at the national, not the regional, level. Our results are four fold. First, final goods and input tariffs in China had significantly negative effects on both firm and industry level productivity and growth. Second, we find positive effects of tax holidays: reducing taxes in China promoted industry productivity when tax holidays were biased towards export intensive sectors and against skill-intensive or R and D intensive sectors, but these positive effects fell over time. Third, we find that the gains from industry promotion change over time: promoting export sectors has large benefits initially, but diminishes over time. We also explore whether tariff and tax policies promoted reallocation of output towards more productive sectors. We find little evidence of this. Instead, the single biggest determinant of reallocating output towards more productive sectors is foreign investment originating outside of Hong Kong, Macau and Taiwan.
Cai, J.; Harrison, A.; Lin, J.Y. The Pattern of Protection and Economic Growth: Evidence from Chinese Cities. (2011) 43 pp. [Draft]