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| The Effectiveness of Industrial Policy in Promoting Global Value Chain Upgrading: Based on the Quasi-Experiment of Chinese Export Processing Zones |
| ZHANG Pengyang, XU Jiajun, LIU Huizheng
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College of Economics and Management, Beijing University of Technology;
Institute of New Structural Economics, National School of Development, Peking University;
Research Base of Beijing Modern Manufacturing Development |
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Abstract This study examines the conditions under which industrial policy can effectively promote the upgrading of the global value chain (GVC). Industrial policy has returned to the agenda of international development, as industrialization and economic structural transformation is at the heart of the Sustainable Development Goals (SDGs) that succeeded the Millennium Development Goals (MDGs). Although there is a basic consensus on the need for industrial policy given the market failures, researchers disagree on how to implement such a policy. The Chinese government has proactively deployed its own industrial policy to enhance exports by implementing the Leading Industries Support (LIS) policy in export processing zones (EPZs) since 2000. Against the background of stagnant global trade growth and China's industrial transformation, changing the role of enterprises in the international division and continuously upgrading the GVC has become increasingly prominent and important. This policy serves as a quasi-experiment enabling us to explore the effectiveness of an industrial policy that promotes GVC upgrading.
We analyze this quasi-experiment using the difference-in-differences method, taking enterprises supported by the LIS policy as the experimental group and those without such support as the control group. To measure the production chain position of export enterprises (i.e., the GVC position) we use the method of Chor et al. (2014). Our empirical data comes from four main sources: (1) the official list of Chinese economic and development zones; (2) China's Industrial Enterprise Database; (3) Chinese customs data; and (4) the World Input-Output Table.
Our key findings are as follows. (1) The LIS policy for the EPZ negatively affects the GVC upgrading of export enterprises, and this finding holds after rigorous robustness checks. (2) Delving deeper into the effect of the LIS policy on heterogeneous firms, we find that the negative impact on GVC upgrading is greater for heavy industry enterprises and enterprises with a large share of state-owned capital. (3) Inspired by the new structural economics, we further test whether the effectiveness of the industrial policy hinges on the alignment of prioritized sectors with comparative advantages. We find that the LIS policy has little negative effect on industries in line with their comparative advantages and even has some positive effect on industries that are better aligned with comparative advantages. We also find that the negative effect of the LIS policy on GVC upgrading is almost insignificant in industries with low resource misallocation.
Our study makes three original contributions. First, we extend the analysis of the effectiveness of Chinese industrial policy from the sector to the GVC level. Second, methodologically we use a quasi-natural experiment to explore the impact of industrial policy on GVC upgrading, which can contribute to a better understanding of the disputed effects of industrial policy. Finally, our study explores the effectiveness of industrial policy depends on the degree of alignment of the prioritized sectors with comparative advantages and resource (mis)allocation.
Regarding policy implications, our findings imply that the government should act to promote GVC upgrading, but not in an unlimited way; that is, industrial policy should be precisely positioned for the comparative advantage of industries, but also premised on avoiding the mismatching of resources. Therefore, this study provides a reference for the government when implementing future industrial policy. From the overall perspective, there should be a boundary in policy implementation. While it should take advantage of situations to guide the industry with comparative advantages, it should be limited on the premise of not causing a mismatch of industry resources. In terms of specific industrial policies, the EPZ policies targeted at expanding exports in the early years are obviously difficult to adapt to the current demand for GVC upgrading of export enterprises. Therefore, the integration of export processing zones into Free Trade Zones (FTZs) will become an important direction in promoting GVC upgrading in the future.
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Published: 29 May 2019
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