The Long-Term Effects of Industrial Policy
This paper provides causal evidence on the impact of a large-scale industrial policy – South Korea’s Heavy and Chemical Industry (HCI) Drive – on firms’ long-term performance and quantifies its long-term welfare effects. Using unique historical data on the universe of firm-level subsidies and a natural experiment, we find large and persistent effects of this industrial policy. Subsidized firms grew faster than those never subsidized for 30 years after subsidies ended. We build a quantitative heterogeneous firm model that rationalizes these effects through a combination of learning-by-doing and financial frictions. The model is calibrated to firm-level data, and its key parameters are disciplined with the econometric estimates. The HCI Drive generated larger benefits than costs. If it had not been implemented, South Korea’s welfare would have been 13-21% lower, depending on how long-lived are the productivity benefits of learning-by-doing. The large majority of the total welfare impact comes from the long-term benefits of learning-by-doing rather than short-term benefits of relaxing financial constraints.
We are grateful to Dominick Bartelme, Alessandro Ferrari, Nir Jaimovich, Isabelle Mejean, Dimitrije Ruzic, Sebastian Sotelo, and seminar participants at Aarhus, the Asia Pacific Trade Seminar, Barcelona Summer Forum, the CEPR Paris Symposium, EIEF, INSEAD, JGU-Mainz, the Lausanne Conference on Conflict and Nation Building, LMU Munich, Michigan, the Paris Trade Seminar, Sant’Anna School of Advanced Studies, the TPR Forum, the UK Foreign, Commonwealth & Development Office, Yonsei, and Zurich for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- The Heavy and Chemical Industry Drive of 1972 to 1979 increased the size and output of targeted firms and industries but was also...