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The causal effects of an industrial policy

Criscuolo, Chiara, Martin, Ralf, Overman, Henry G. and Van Reenen, John (2012) The causal effects of an industrial policy. SERC Discussion Papers, SERCDP0098. Spatial Economics Research Centre (SERC), London School of Economics and Political Science, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.spatialeconomics.ac.uk/SERC/publication...
Additional Information: © 2012 The Authors
Library of Congress subject classification: H Social Sciences > HC Economic History and Conditions
Journal of Economic Literature Classification System: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies
L - Industrial Organization > L5 - Regulation and Industrial Policy > L52 - Industrial Policy; Sectoral Planning Methods
L - Industrial Organization > L5 - Regulation and Industrial Policy > L53 - Government Promotion of Firms
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output (Income) Convergence
Sets: Departments > Geography and Environment
Research centres and groups > Spatial Economics Research Centre
Research centres and groups > Centre for Economic Performance (CEP)
Research centres and groups > What Works Centre for Local Economic Growth (WWG)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: SERCDP0098
Funders: Economic and Social Research Council (ESRC), Department for Business, Innovation & Skills (BIS) , Welsh Assembly Government
Date Deposited: 31 Jul 2014 14:15
URL: http://eprints.lse.ac.uk/58575/

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