Revisiting the relationship between industrial policy and firm innovation: a quasi-natural experiment from China

The relationship between industrial policy and innovation has been well-documented in the literature, but has yielded mixed results. By using the Revitalization Plan for Ten Industries (RPTI) in China as a quasi-natural experiment, we examine the impact of industrial policy on quantity and quality of firm innovation within a difference-in-differences (DID) framework. The empirical results suggest that RPTI has no observable impact on innovation quantity but significantly reduces innovation quality, a finding that remains valid across a series of endogeneity and robustness checks. Plausible mechanisms connecting industrial policy with innovation quality are further examined, including decreasing capacity utilization, reducing fiscal science and education expenditures, and lowering the marketization level. The negative effects appear more significant for enterprises with less knowledge stocks, firms located in economically underdeveloped regions, resource-based cities, and at the intensive margin. Our findings shed novel light on the industrial policy-innovation linkage, with instructive implications for enabling technological leapfrogging in emerging economies.