Summary:
During the 14th Five-Year Plan period, China has set forth new requirements for the development of strategic emerging industries and new goals of “characteristic development, complementary advantages and reasonable structure.” Industrial development should focus on seizing opportunities for future industrial development and cultivating leading and pillar industries. However, it remains unclear how to develop strategic emerging industries and transform industrial policy support from quantity-oriented to quality-and efficiency-oriented. This paper studies the mechanism and effective support space of industrial policy on firms' markups. The results show that first, the strategic emerging industry policy has significant positive effect ,because firm's productivity and R&D are relatively high in this industry.Second, in terms of the mechanism, strategic emerging industry policies affect firms' markups through the cost and price channels. Currently(1998-2013), the negative cost effect is greater than the positive price effect, resulting in an overall negative effect. Third, in terms of heterogeneity, the industrial technology gap has a significant negative moderating effect on firms' markups, and a positive trend is observed between this effect and the technological convergence level. Fourth, further analysis shows that the innovation trap of focusing on quantity but neglecting quality, a consequence of support, is the main cause of decreasing overall markups. This paper presents innovations in several areas. Theoretically, it explores the mechanism by which industrial policy affects firms' markups in the context of China's efforts to catch up with more developed economies. It amends industrial policy support theory and considers the technology gap in its conceptualization of the support space. Empirically, this paper reveals the effect of the strategic emerging industries policy on firm markups. Previous studies have obvious sample selection bias and fail to observe dynamic changes in markups (Lu et al., 2014; Liu, 2016). This paper uses industrial firm database records from 1998 to 2013 to study the effect of the strategic emerging industries policy, and it uses patent data with complete citation information to estimate patent quality. The innovation incentive of emphasizing quantity but neglecting quality, a consequence of the strategic emerging industry policy, is identified as the main cause of the negative markup effect. In terms of policy, this paper provides empirical evidence for the optimal implementation space of industrial policy. From the perspective of the technology gap, this paper provides an effective approach to optimizing the policy implementation space and to promoting the dynamic evolution of government support from pioneering to enabling. This transition can enhance the effectiveness of industrial policy and promote the development of high-quality innovations. This paper also has several policy implications. First, the levels of industrial development, quality and efficiency should be considered crucial targets of industrial policy support. Policymakers should consider relaxing the assessment of the total number of patents and number of patents per capita, not setting binding indicators, reducing selective subsidies, strengthening the dynamic tracking of patent implementation and rewarding patent achievements with a good industrialization effect and high degree of marketization at a later time. Also, the combination of industrial policy implementation and the industrial technology gap should be maintained. Second, optimization of the market environment and government functions is a crucial strategy to improve the quality of strategic emerging industries. In the early stage, industrial development mainly depends on a high-quality business environment and competitive neutral market environment, and the government effectively handles market competition as a regulator. When the technology gap is relatively small, the government should effectively manage market competition and drive innovation as an enabler. Third, the deep integration of strategic emerging industries and various industries should be targeted for the optimization of industrial policy. A reliance on high-quality innovations by strategic emerging industries should expand the number of important products and key core technologies in the industrial supply chain, focus on upstream core links and enhance the ability of the chain owner to lead and drive the industrial supply chain. Key departments should be created to effectively link the innovation and industrial chains and enhance modernization of the industrial and supply chains.
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