Key Industrial Policy and the Efficiency of Firms' Credit Utilization
LIU Hongkui, WU Maohua, LIU Canlei
Institute of Economics, Chinese Academy of Social Sciences; School of Public Finance and Taxation, Nanjing University of Finance and Economics; School of Economics, University of International Business and Economics
Summary:
Industrial policy serves as a crucial instrument for a promising government, aiming to direct scarce resources toward specific industries and firms, thereby optimizing resource allocation and enhancing efficiency.As a core factor in production activities, the accessibility and efficiency of capital directly shape firms' capacity for production expansion and innovation. The effectiveness of industrial policy lies not only in whether it helps firms secure financing, but more importantly, in whether firms can efficiently transform such financing into output and competitiveness. At present, bank loans remain the primary financing channel for firms, with reliance on bank credit being particularly pronounced during the early stages of development. Existing studies suggest that industrial policy can alleviate firms' financing constraints to a certain extent and effectively deliver additional economic benefits—such as fiscal subsidies, tax exemptions, and credit support—to targeted firms and industries. However, critical questions remain insufficiently explored at the micro-firm level: how firms allocate acquired loans, whether they utilize them efficiently, and whether such financing truly accelerates firm growth. This raises the central research motivation of this paper: while industrial policy enhances firms' access to loans, does it also improve the efficiency of credit utilization？ Moreover, through what primary mechanisms does industrial policy affect firms' credit use efficiency？ This paper utilizes data on China's key industrial policies and listed firms from 2006 to 2020 to construct an indicator measuring firms' credit utilization efficiency by the ratio of operating revenue to bank loans, and empirically tests the impact of key industrial policies on this efficiency. The findings reveal that, compared with firms not supported by such policies, those receiving key industrial policy support exhibit a higher level of output per unit of loan. This indicates that under policy incentives, firms are able to convert credit more effectively into operating revenue, reflecting stronger credit utilization efficiency. Heterogeneity analysis shows that this policy effect is more pronounced among firms with longer establishment histories, stronger profitability, and higher R&D investment. This may be attributed to such firms' superior resource acquisition capabilities, higher compliance with policy implementation, and greater efficiency in factor transformation. Further mechanism analysis suggests: (1) In terms of credit resource allocation, key industrial policies significantly optimize the flow of bank loans, effectively alleviating firms' credit shortages and channeling credit toward enterprises with greater development potential; (2) As for firm behavior incentives, key industrial policies substantially enhance firms' cash turnover efficiency and utilization efficiency of current assets, thereby intensifying the utilization of credit resources; (3) For the guidance of industrial development directions, key industrial policies help steer firms toward long-term development by encouraging them to expand fixed asset investment, increase R&D expenditure, and strengthen their long-term investment intentions. The implications of this study suggest that China should further optimize the design of industrial policies to enhance overall resource utilization efficiency and promote high-quality economic development. First, industrial policy design should be refined to strengthen its functional role in resource allocation. Compared with traditional selective industrial policies, future approaches should place greater emphasis on the role of industrial policy in guiding the efficient allocation of resources. Second, diverse market actors should be incorporated into the policymaking process to enhance the precision and foresight of industrial policies. Third, key industrial policies should place a stronger emphasis on resource utilization efficiency in order to improve the effectiveness of resource allocation. To further enhance the actual efficiency of credit utilization, the role of financial institutions in the implementation of industrial policies should be strengthened. Finally, the role of industrial policy in shaping industrial development directions should be reinforced, thereby fostering stable expectations among market participants. It is also essential to shift in a timely manner from traditional selective industrial policies toward market-enhancing industrial policies, with greater emphasis on the guiding role of industrial policy, so as to promote consensus and coordinated actions among market participants.
Aghion, P., J. Cai, M. Dewatripont, L. Du, A. Harrison and P. Legros, 2015, “Industrial Policy and Competition”, American Economic Journal: Macroeconomics,7(238), pp. 1～32.
[22]
Beason, R. and D.E. Weinstein, 1996, “Growth, Economies of Scale, and Targeting in Japan (1955-1990)”, Review of Economics and Statistics, pp. 286～295.
[23]
Blonigen, B.A., 2016, “Industrial Policy and Downstream Export Performance”, Economic Journal, 126(595), pp. 1635～1659.
[24]
Chen, D., O.Z. Li and F. Xin, 2017, “Five-year Plans, China Finance and Their Consequences”, China Journal of Accounting Research,10(3), pp. 189～230.
[25]
Choi, J. and A.A. Levchenko, 2025, “The Long-Term Effects of Industrial Policy”, Journal of Monetary Economics, 152, 103779.
[26]
Criscuolo, C., R. Martin, H. Overman and J. Van Reenen, 2012, “The Causal Effects of an Industrial Policy”, National Bureau of Economic Research.
[27]
Fang, H., M. Li and G. Lu, 2025, “Decoding China's Industrial Policies”, National Bureau of Economic Research.
[28]
Hadlock, C.J. and J.R. Pierce, 2010, “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index”, Review of Financial Studies 23(5), pp. 1909～1940.
[29]
Harrison, A. and A. Rodríguez-Clare, 2010, “Trade, Foreign Investment, and Industrial Policy for Developing Countries”, Handbook of Development Economics, 5, pp. 4039～4214.
[30]
Kieschnick, R. and R. Moussawi, 2018, “Firm Age, Corporate Governance, and Capital Structure Choices”, Journal of Corporate Finance, 48, pp. 597～614.
[31]
Krueger, A.O. and B. Tuncer, 1982, “An Empirical Test of the Infant Industry Argument”, American Economic Review, 72(5), pp. 1142～1152.
[32]
Lall, S., 2013, “Reinventing Industrial Strategy: The Role of Government Policy in Building Industrial Competitiveness”, Annals of Economics and Finance, 14(2), pp. 785～829.
[33]
Lane, N., 2025, “Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea”, Quarterly Journal of Economics, 140(3), pp. 1683～1741.
[34]
Lin, J.Y., 2011, “New Structural Economics: A Framework for Rethinking Development”, World Bank Research Observer, 26(2), pp. 193～221.
[35]
Pack, H. and K. Saggi, 2006, “Is There a Case for Industrial Policy？ A Critical Survey”, World Bank Research Observer, 21(2), pp. 267～297.
[36]
Peters, M. and M. Schneider, T. Griesshaber and V.H. Hoffmann, 2012, “The Impact of Technology-push and Demand-pull Policies on Technical Change-Does the Locus of Policies Matter？ ”, Research Policy, 41(8), pp. 1296～1308.
[37]
Powell, B., 2005, “State Development Planning: Did it Create an East Asian Miracle？”, Review of Austrian Economics, 18(3), pp.305～323.
[38]
Richardson, S., 2006, “Over-investment of Free Cash Flow”, Review of Accounting Studies, 11(2), pp. 159～189.
[39]
Rodrik, D., 1996, “Coordination Failures and Government Policy: A Model with Applications to East Asia and Eastern Europe”, Journal of International Economics, 40(1-2), pp. 1～22.
