TY - JOUR AU - Criscuolo,Chiara AU - Martin,Ralf AU - Overman,Henry AU - Reenen,John Van TI - The Causal Effects of an Industrial Policy JF - National Bureau of Economic Research Working Paper Series VL - No. 17842 PY - 2012 Y2 - February 2012 UR - http://www.nber.org/papers/w17842 L1 - http://www.nber.org/papers/w17842.pdf N1 - Author contact info: Chiara Criscuolo Centre for Economic Performance London School of Economics Houghton Street London WC2A 2AE United Kingdom Tel: 004420 7955 6973 E-Mail: chiara.criscuolo@oecd.org Ralf Martin Imperial College Business School London SW7 2AZ, UK E-Mail: R.Martin@lse.ac.uk Henry Overman London School of Economics Houghton Street London WC2A 2AE UK E-Mail: h.g.overman@lse.ac.uk John Van Reenen Department of Economics London School of Economics Centre for Economic Performance Houghton Street London WC2A 2AE UNITED KINGDOM Tel: 00 44 207/955-6976 Fax: 00 44 207/955-6848 E-Mail: j.vanreenen@lse.ac.uk AB - 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. ER -