TRADE, INVESTMENT AND COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Industri l Polic Eff cts nd th C s for Comp tition Georgiana Pop Davida Connon This note was prepared by Georgiana Pop (Global Lead for Competition Policy) and Davida Connon (Private Sector Development Specialist). Julian Koschorke (Junior Professional Officer) provided valuable inputs. The authors are grateful to Michael Ferrantino (Lead Economist) and Yue Li (Senior Economist) for valuable comments and insights, and to Christine Qiang (Practice Manager) for overall advice. ABSTRACT Comp tition polic nd industri l polic —not mutu ll xclusiv It is conventional wisdom that industrial policies can be at odds with competitive markets. This note examines the historical basis for industrial policy and empirical effects. Although the direct effects of industrial policy are mixed, the indirect effects often involve market distortions. By contrast, the literature is broadly united on the benefits of competition for productivity and innovation. This review finds that the most successful industrial policies reinforce competition, suggesting that competition policy and certain types of industrial policy can be crafted as complements. © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO), http:// creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: Pop, Georgiana, and Connon, Davida. 2020. Industrial Policy Effects and the Case for Competition.” EFI Insight-Trade, Investment, and Competitiveness. Washington, DC: World Bank. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Diego Catto / www.diegocatto.com 4 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT >>> Contents 1. Introduction 7 2. Industrial Policy: Contours and Critics 11 3. Industrial Policy Effects 15 Subsidies 16 Trade Policy 21 State-owned enterprises 23 Public procurement 27 4. Combining Industrial and Competition Policy 31 5. Conclusion 35 References 37 INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 5 1. >>> Introduction Competition is a key driver of growth and innovation. At the same time, conventional wisdom— and the weight of the evidence—often suggests that competition policy and industrial policy are conflicting alternates (figure 1). Competition policies aim to foster competition between market players on a level playing field. There, all market players face the same set of rules and entry opportunities, thus reducing the risks of the anticompetitive effects associated with monopolies and dominance. By contrast, industrial policy actively alters those rules through targeted support measures, policy or regulatory protection of incumbents from competition, preferential treatment, and direct government intervention in favor of certain industries and firms. One of the most common forms of industrial policy, subsidies, can distort competition by affecting firms’ entry and exit decisions, especially in highly concentrated markets. Subsidies also distort competition by affecting pricing and production decisions, and companies may make different decisions about the level of spending on research and development (see OFT 2004). Tariffs and other trade policy instruments are vulnerable to similar criticism, with the evidence broadly showing that trade-restrictive measures reduce market competition and subsequently have negative effects on productivity or result in higher price-cost margins for protected firms—see, for example, Dutz (1991) on Morocco; Harrison (1994) on Côte d’Ivoire; Krishna and Mitra (1998) and Khandelwal and Topalova (2011) on India; and Levinsohn (1993) on Turkey. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 7 > > > F I G U R E 1 - Industrial policy tools versus competition policy Industrial Policy • Subsidies / tax breaks / loans • Trade policy • State-owned enterprises • Preferential public procurement NOMIC GROWTH O V A T I O N , AND ECO V I T Y, I N N PRODUCTI Competition Policy • Opening markets and removing anticompetitive regulation • Promoting a level playing field • Ensuring effective competition law enforcement Source: World Bank. Meanwhile, the empirical record consistently shows that growth, and improvements in overall welfare. The benefits competition and open markets have a positive effect on of competition for firm productivity and innovation are widely sustainable economic growth by driving investment and accepted (see, for example, Aiginger 1997; Bouis and Duval improving private sector dynamism. Competition fosters cost 2011; Bourlès et al. 2010; Commander and Svejnar 2011; reductions, innovation, and productivity growth (Acemoglu, Conway et al. 2006; Nicoletti and Scarpetta 2005; Porter Antràs, and Helpman 2007; Aghion and Griffith 2008). Two 1990). Accordingly, the positive effects of competition policy mechanisms contribute to this result: first, competition shifts enforcement on productivity growth are well documented market share toward more efficient producers, and, second, (Buccirossi et al. 2013; Voigt 2009). Strong enforcement competition induces firms to become more efficient in order to has been shown to reduce the negative economic effects of survive (Kitzmuller and Licetti 2013). anticompetitive behavior such as cartels (Alexander 1994; Symeonidis 2008), and competition laws may have an indirect In practice, competition policy focuses on three main areas: effect on domestic competition by promoting entry (Kee and (1) the promotion of pro-competitive regulations and government Hoekman 2006). Evidence also points to the positive impacts interventions to enable contestability, firm entry, and rivalry; (2) on overall productivity of competition and the efficient allocation competitive neutrality and nondistortive public aid support; and of inputs and outputs across businesses (Eslava et al. 2004). (3) the enforcement of antitrust laws (typically rules against abuse of dominance and anticompetitive agreements, as well Greater competition in domestic markets can also enhance as merger control) (World Bank 2017). The main objective of the ability of firms to compete in international markets (Goodwin enhanced competition is to generate the right incentives for firms and Pierola 2015). Firms typically acquire many of their inputs— to improve their economic performance relative to their actual transport, energy, telecommunications, and financial services— and potential rivals and in so doing deliver the best outcomes in local markets. If those upstream markets lack competition, for consumers and the economy as a whole. It is not to increase prices may be higher, raising costs for downstream firms the number of firms in a market or to eliminate market power to and making them less competitive in international markets. achieve a theoretical state of perfect competition. Meanwhile, competition increases the variety and quality of goods and services, and it can lead to lower consumer prices In competitive environments, investment is higher (Alesina et (Edmond, Midrigan, and Yi Xu 2011; Igami 2015; Treichel et al. 2005), and it leads to employment gains, faster economic al. 2012). 8 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Notwithstanding the observed benefits of competition, it This note focuses on the intersection between competition is not a panacea and will not always lead to optimal market and industrial policy. Both seek to improve productivity and outcomes. Competition policy, too, faces challenges, and innovation, thereby contributing to economic growth. However, market imperfections and failures may warrant government both face shortcomings in certain contexts. Although the bulk of intervention (Aghion, Boulanger, and Cohen 2011). For the evidence examined in the following sections suggests that example, if the market is left alone to deal with pollution and industrial policy fails on many counts, in some circumstances environmental damage, it produces less clean production it can effectively address market failures or imperfections in and less clean innovation than would be needed to mitigate competitive markets. negative externalities from climate change and global warming. According to Aghion, Dechezleprêtre, et al. (2010), firms From this perspective, this note explores the empirical with a history of “dirty production” continue to create “dirty evidence on the direct and indirect effects of industrial policy innovation,” whereas the opposite is true for companies with interventions, and it considers whether industrial policy can a history of clean innovation. This finding suggests that there be designed in a manner compatible with market competition is a path dependency in innovation. Combined with a history and supportive of its benefits. Section 2 examines the evolution of “dirty” technologies, this path dependency implies that of industrial policy and explains the most common criticisms. markets produce socially suboptimal levels of clean innovation. Section 3 reviews the empirical evidence on the direct Acemoglu et al. (2012) argue that the best way to direct research and indirect effects of the most prominent industrial policy in this area is to combine economy-wide measures, such as instruments, seeking to identify instances in which competition- carbon trading or carbon taxes aimed at reducing pollution, friendly industrial policy produces positive market effects. With with more targeted or sector-specific measures, such as clean such a review, one is better equipped to understand when innovation subsidies. According to the analysis, adopting only industrial policy tools create the fewest distortions and how economy-wide measures would produce inferior results and be they can be better designed to counteract market failures while excessively distortionary. minimizing distortions to markets. Section 4 reviews evidence on competition-friendly industrial policy, and section 5 offers some conclusions. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 9 2. >>> Industrial policy: Contours and critics Industrial policy is generally categorized one of two ways: that which is economy-wide, cross- cutting, or horizontal, and that which is targeted at the sector or firm level. Whereas the former generally benefits the wider economy or the business environment, the latter is aimed at improving the performance of specific industries or firms. Table 1 compares these two types of industrial policy in different market contexts (Crafts and Hughes 2014, 4). INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 11 > > > T A B L E 1 - Examples of horizontal versus selective industrial policy instruments by policy objective HORIZONTAL SELECTIVE PRODUCT MARKET Competition policy National champions Indirect tax Nationalization/privatization Product market regulation State aid Exchange rate policy Trade policy Public procurement LABOR AND SKILLS Education policies Targeted skills policy Training subsidies Apprenticeship policies Wage subsidies Labor market regulation Employment taxes CAPITAL MARKET Corporate tax policy State investment bank Financial market regulation Strategic investment fund Emergency loans LAND Land use planning rules Place-based clusters policy Infrastructure policy Enterprise zones TECHNOLOGY R&D tax credit Public procurement Science budget Patent box Intellectual property rights regime Selective technology funding Source: Crafts and Hughes 2014. Historically, the most popular industrial policy tools were Country experiences show that, in practice, industrial policy targeted at the sector or firm level, used to create national encompasses a range of active government interventions in the champions and protect infant industries. In postwar Europe, economy and the creation of open, competitive markets. For for example, industrial policy was highly targeted and example, China, Japan, the Republic of Korea, and Taiwan, interventionist—that is, it was closely linked to the support of China, among others, have all employed policies that are specific industries and industrial sectors and their isolation from often described as industrial policy, but that vary widely upon international markets (Pack 2010). In the 1970s, an increasingly closer analysis. Japan, for example, was often perceived cross-cutting approach emerged, focusing more on measures during the late twentieth century as employing economic to shape the business environment for all enterprises in a institutions that favored collaboration over competition. Despite nondiscriminatory manner (Bianchi and Labory 2006; Uvalic this, according to Porter and Sakakibara (2004, 28), “in the 2014). Because such policies are theoretically designed in a internationally successful industries, internal competition in competitively neutral way, they should have no (or very little) Japan was invariably fierce.” Korea’s chaebols (large business impact on market competition (Välilä 2006). In practice, a conglomerates) have been fostered and supported since the policy subsidizing research and development (R&D) might 1960s, often selected based on international success and benefit research-intensive industries more than others (Crafts granted various subsidies and protections. However, the same and Hughes 2014), but it is not intended to give an advantage companies have been expected to compete openly on export to certain enterprises or sectors over others. Indeed, Crafts markets (Lall 1994). and Hughes (2014) argue that competition policy is a form of “horizontal” industrial policy, while Labory (2006) classifies China, arguably responsible for the reemergence of the competition policy as a distinct pillar of industrial policy, separate industrial policy debate globally (Aghion, Boulanger, and from both horizontal and more targeted measures. Cohen 2011), has settled on a mix of classically interventionist 12 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT industrial policies and market competition, while relying heavily on state-owned enterprises, or SOEs (Xiaojuan 2002). Indeed, Despite the wide variety of measures that can be categorized research by Noland and Pack (2003) suggests that industrial as “industrial policy,” it is often criticized based on a state’s (lack policy alone in China was not responsible for an increase in of) capacity and political economy concerns. These concerns the overall productivity of firms. Similarly, Taiwan, China, relate primarily to sector- or firm-specific measures. For actively supports sectors such as cotton textiles, plastics, and example, it is argued that the state is poorly placed to assess the automobiles, but has employed a policy blend that does not fully possible economic success of different enterprises or sectors conform with classical notions of industrial policy (Wade 1990). over others. And even if the government does choose correctly, In the United States, although the government is a champion of industrial policy risks inducing rent-seeking or capture. Ades antitrust laws and competitive markets, industrial policy is still and Di Tella (1997), employing a sample of 32 mainly member apparent through exemptions for certain entities from antitrust countries of the Organisation for Economic Co-operation and laws, through trade protection measures, agricultural subsidies, Development (OECD), find evidence suggesting that corruption and procurement policies, as well as actions at the state level is indeed higher in countries pursuing active industrial policies. (White 2008). For example, through the 1980s and 1990s the Korea Fair Trade Commission tried to curb anticompetitive practices by the Because of the diverse range of industrial policy tools and country’s chaebols, but it failed because of the connections that attitudes toward industrial policy, ultimately “there is no universal existed between those companies and the Korean government definition of industrial policy and definitions range from restrictive (Noland 2000). to broad” (Bianchi and Labory 2006, 604). Nonetheless, definitions converge around the notion that the purpose of government Tariffs, under the guise of industrial policy, frequently serve interventions in the economy is to enhance economic growth and to protect special interest groups with political ties strong performance through the productivity, innovation, and overall enough to be sheltered by government-sponsored protective competitiveness either of entire sectors or of specific companies measures. Indeed, Goldberg and Maggi (1999) demonstrate and industries. For example: that trade protection is in fact often for sale. Studying the pattern of trade protection in the United States in 1983, they find • Wade (1990, 13): “Industrial policy aims to direct that the lobbying contributions of industry corresponded with resources into selected industries so as to give levels of protection and relevant import barriers, although the producers in those industries a competitive advantage.” government continued to be welfare-maximizing in its decisions • World Bank (1993, 304): Industrial policy is to exchange protection for financial contributions. Gawande, “government efforts to alter industrial structure to Krishna, and Olarreaga (2012) also demonstrate the relevance promote productivity-based growth.” of lobbying as a significant determinant of trade policy, although • Foreman-Peck and Federico (1999, 3): Industrial they argue that it reduces the welfare-maximizing decisions of policy is “every form of state intervention that affects government. Similarly, Mobarak and Purbasari (2005) show that industry as a distinct part of the economy.” politically connected firms are from 6 to 22 percentage points • Chang (2003, 112): Industrial policy is “aimed at more likely to receive import licenses than their competitors, particular industries (and firms as their components) to and the licenses often lead to the creation of monopolies. achieve the outcomes that are perceived by the state to be efficient for the economy as a whole.” Concerns about the legitimacy of industrial policy and • Soete (2007, 273): Industrial policies are “structural government intervention are compounded when the empirical policies designed to strengthen the efficiency, scale record of industrial policy is taken into account. And yet, although and international competitiveness of domestic industrial economists and other competition advocates dismiss industrial sectors,” while conceding that this “typically contains policy as ineffective (Aghion, Boulanger, and Cohen 2011), it an element of national champions, of self-reliance in continues to abound in practice. Private sector lobbying and bringing about growth and development.” genuine government efforts to promote various diverse public • Warwick (2013, 16): “Industrial policy is any type objectives, such as sector or regional development or increased of intervention or government policy that attempts productivity, spur governments to resort to industrial policy to to improve the business environment or to alter protect specific industries or firms and give them an advantage the structure of economic activity towards sectors, over others. The next section explores the success of such technologies or tasks that are expected to offer better measures, presenting a review of the empirical evidence on the prospects for economic growth or societal welfare than ability of the most common industrial policy tools to achieve their would occur in the absence of any such intervention.” intended goals and counteract market failure (direct effects) while minimizing distortive effects on markets (indirect effects). INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 13 3. >>> Industrial policy effects The most prominent industrial policy tools include (1) subsidies or state aid—that is, policies that provide benefits to firms such as tax breaks, below-market loans, and direct transfers; (2) strategic trade policy, including import tariff protection and local content requirements; (3) nationalization of business through state ownership; and (4) discretionary or discriminatory procurement procedures that reduce competition among firms and often favor domestic over foreign bids (see Crafts and Hughes 2014; Tilton 1996). The nationalization of business is exemplified by China, where direct government involvement in the economy through SOEs is a dominant form of industrial policy. More nuanced approaches include measures to remove coordination failures between investors and firms to encourage concurrent investment, such as information exchanges, and sequenced subsidies to firms in relevant industries (Harrison and Rodriguez-Clare 2010; Pack and Saggi 2006). The sections that follow review the literature examining the direct effects of the most prominent industrial policy measures on their stated goals, such as increased productivity, employment, or investment in R&D, as well as their indirect effects on the market and competition, observed through effects on market share, markups, allocative efficiency, and overall welfare. Empirical assessments of indirect effects are less common, in part because of the difficulties involved in measurement and the availability of data. Where industrial policies are found to deliver on their intended goals, they tend to reinforce efficiency and competitive principles and support competition more broadly in the market. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 15 >> SUBSIDIES Subsidies are the most widely used industrial constraints in the market in the absence of government R&D policy instrument. The World Trade Organization’s subsidies (Takalo and Tanayama 2008). Moreover, subsidies Agreement on Subsidies and Countervailing Measures defines can help to increase competition in markets with high barriers a subsidy as a financial contribution by a government or any to entry by, for example, subsidizing upfront set-up costs and public body that confers a benefit (Article 1). Article 107 of the supporting small and medium enterprise (SME) development. Treaty on the Functioning of the European Union defines a subsidy as “any aid granted by a Member State or through State But because subsidies can be highly targeted and tamper resources in any form whatsoever which distorts or threatens with market signals, they may cause two basic types of to distort competition by favoring certain undertakings or the inefficiencies: productive inefficiency and allocative inefficiency. production of certain goods.” It stipulates that such measures Productive inefficiency occurs when the total output produced in are inconsistent with the common market except in certain the economy does not draw from a cost-minimizing combination limited cases. Bianchi and Labory (2006, 619) define state of inputs because production by inefficient firms is encouraged. aid as “financial transfers to business that take many forms In lowering costs for some firms, subsidies distort operational such as subsidies, grants, tax exemptions, etc.” Per European decisions and incentives, influencing cost management Union (EU) guidance, subsidies that are open to all enterprises, and production, reducing productivity, and distorting prices. such as general taxation measures or employment legislation, Subsidies correspondingly distort firms’ ability to stay in the are not prohibited and do not constitute state aid.1 Currently, market, despite lackluster productivity compared with that of the European Commission presumes that state aid distorts their competitors. And different types of subsidies can have competition, yet it approves 98 percent of applications, often for discrete effects. For example, if firms can count on receiving social or distributional reasons. bailout aid, this creates relatively soft budget constraints on them and may encourage riskier behavior. Likewise, the Subsidies are often justified based on the need to alleviate possibility of R&D aid may reduce the incentives for firms to market failures caused by externalities (such as public goods), innovate in order to reduce costs, improve quality, and become by informational asymmetries, or a lack of competition (Spector more efficient using private funds (Spector 2009). 2009). Externalities may be inefficient, such as when the market is not able to provide the optimal level of a good or service, as Allocative inefficiencies result when resources are directed may be the case with infrastructure such as roads and ports. away from the most efficient and productive firms in an Or externalities may be socially unacceptable, such as when economy. This creates capital misallocation and an inefficient the market generates negative externalities such as pollution or dispersion of activity, which has knock-on impacts on total other types of environmental damage. The outcome of the market factor productivity, or TFP (Herrera, Lugauer, and Chen 2018; may also be efficient but deemed unfair, thereby justifying, for Restuccia and Rogerson 2017). These impacts can contribute example, targeted education grants or regional development to low-productivity firms gaining or maintaining higher market programs for redistributive purposes and to increase overall shares at the expense of others. Moreover, when aid is available welfare. Subsidies can also correct market failures caused by firms have good reason to direct resources toward rent-seeking informational asymmetries in certain markets—for example, activities, such as lobbying, rather than more productive uses for high-tech firms and R&D activities that may face credit (Spector 2009). 1. European Commission, Competition, State Aid Control, https://ec.europa.eu/competition/state_aid/overview/index_en.html. 16 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT As a result of these dynamics, it is critical to assess both the However, the same study finds that subsidies increase pro- direct effects of subsidies, at the level of subsidy recipients, and ductivity growth by 0.03 percentage points when they are more the indirect effects, which include spillovers to nonbeneficiaries widely dispersed across firms in a given sector (Domadenik, as well as impacts on competition outcomes measured at the Koman, and Prasnikar 2018). Along the same lines, in study- market level. At the beneficiary level, direct effects are assessed ing 11 EU member states between 1992 and 2003, Gual and by determining whether the subsidy induced the recipient to Jodar-Rosell (2006) find that state aid, awarded primarily for take a different course of action or induced additional activity objectives such as R&D investment, SMEs, or worker training, compared with a scenario in which it did not receive the despite it ultimately targeting the manufacturing sector, has a assistance (the incentive effect). At the market level, the spillover positive effect on TFP growth. Aghion, Boulanger, and Cohen effects on nonbeneficiaries (such as crowding out of activity) and (2011) use Chinese firm-level panel data to show that subsidies the indirect effects on competition outcomes, observed through have stronger positive effects on TFP and innovation when di- markups and expansions in market share of recipients at the rected to more competitive sectors and when they are less con- expense of nonrecipients, are most relevant (Rotemberg 2019). centrated in those sectors. In a similar study, Aghion, Dewatri- pont, et al. (2010) show that the effects can even be negative for sectors with a low degree of competition, with the positive >>> DIRECT EFFECTS effects increasing as competition increases. As for industrial policy more generally, most of the literature and government evaluation programs focus on the direct As for the effects of subsidies on employment, the evidence effects of subsidies—that is, whether they achieve their primary is somewhat mixed. Studies differentiate between static objectives such as higher productivity, job creation, export efficiency (defined in terms of keeping people employed) and promotion, or sector-level investment in R&D. The literature dynamic efficiency (defined as creating new jobs). Using a indicates that subsidies are limited in their ability to obtain matching technique, Murn, Burger, and Rojec (2009) find that their primary objectives and may even be counterproductive in although subsidies prove ineffective in creating new jobs, the certain contexts. firms receiving aid lay off fewer workers than firms that did not receive aid (static efficiency). Likewise, in the United Kingdom Subsidies intended to increase productivity, for example, are discretionary grants to firms for investment in economically often found to have little to no significant effect in the long run disadvantaged areas significantly reduce unemployment in and, if so, only under special circumstances. In some instances, the areas targeted and increase investment and the net entry subsidies even decrease productivity. Comparing Swedish of firms (Criscuolo et al. 2012). However, the same study also companies that received state aid to companies that did not, identifies a negative impact on aggregate productivity growth, Bergstrom (2000) finds that the productivity of subsidized firms pointing to possible interference by state aid in the allocative increases in the first year after the support, but that in the long efficiency mechanism of the market. Meanwhile, Martin, Burger, run productivity falls below that of firms that did not receive and Mayneris (2011) use a difference-in-difference approach to any support. Similarly, Van Cayseele, Konings, and Sergant investigate the effect of policies aimed at promoting industrial (2014) find that state aid enhances productivity growth most for clusters in France, finding that the policies failed to stimulate firms that are cash-poor, meaning that laggard firms (which are employment (dynamic efficiency). more likely to be financially constrained) experience more TFP growth than close-to-frontier firms when receiving state aid (this Although the direct effects of subsidies on exports are widely effect is driven mainly by the postcrisis years in the sample). supported in theory (see Cohen 2006; Harrison and Rodriguez- Studies of Japan and Korea find that subsidies have no or Clare 2010; Warwick 2013), empirical support is weak. Looking only negligible impacts on productivity (Beason and Weinstein at short-run relationships in the European Union, Stöllinger and 1996; Lawrence and Weinstein 1999; Ohashi 2005). Harris and Holzner (2017) find limited evidence that state aid promotes Robinson (2004) find no evidence of benefits from state aid manufacturing value-added exports. Although €1 million in when comparing similar receiving and nonreceiving companies additional aid to the manufacturing sector leads to an increase in the United Kingdom. Investigating the impact of state aid to in manufacturing value-added exports of €1.37 million for the the Slovenian manufacturing industry, Schweiger (2011) finds average EU member state, the results vary significantly across that there is no significant impact on TFP. Another Slovenian EU members in the sample. Indeed, the effects were weakest study finds that firms receiving a higher portion of subsidies for countries with less competitive manufacturing sectors. are less productive when compared with counterparts from Likewise, in their study of policies promoting industrial clusters the same sector receiving fewer or no subsidies (Domadenik, in France, Martin, Mayer, and Mayneris (2011) find that the Koman, and Prasnikar 2018). policies were unable to reverse the declining productivity trend of targeted firms and had no robust effect on exports. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 17 By contrast, in their analysis of the relationship between Some variance is observed based on the size of the receiving sector-specific state aid provided by 12 EU member states firm and aid intensity. In a study of Israeli manufacturing firms, between 1995 and 2008 and their corresponding share of total Lach (2002) finds that although subsidies have a significant EU exports, Aghion, Boulanger, and Cohen (2011) find that positive effect on the R&D expenditure of small firms, the effect sectoral aid can have a positive effect on export performance is negative for large firms. Bronzini and Iachini (2014) come and innovation, but principally where aid is more decentralized to a similar conclusion regarding an R&D subsidy for Italian across economies. Badinger and Url (2012) assess the impact firms. González, Jamandreu, and Pazó (2005) examine the of export credit guarantees issued by the Austrian export effects of R&D policies in Spain and find a positive (small) credit agency on the export performance of a cross-section of effect on private investment, but again mainly for small firms. Austrian firms, identifying a large and statistically significant In a study of state aid in Lithuania, the effects vary by sector effect on the export performance of recipient firms. Again, the and aid intensity, with state aid having the greatest effect on more competition-friendly the subsidy and the less targeted it is the development of educational projects, followed by research, in terms of selecting firms, the more positive are the outcomes. experimental projects, and production projects (Ginevičius, Podvezko, and Bruzge 2008). In a study of SMEs across the Subsidies are also often employed to promote the rescue Finnish economy, Hyytinen and Toivanen (2005) find that firms and restructuring of firms in difficulty. Studies reveal that these in industries that are more dependent on external financing subsidies have fewer positive impacts. London Economics invest relatively more in R&D and are relatively more growth- (2004) analyzed 71 cases in which restructuring and rescue aid oriented when they have more government funding (potentially) was granted between 1995 and 2002, finding that only one-third available. An ex post impact evaluation of state aid schemes of the recipient firms continued with the same legal status when in Romania finds that a state aid scheme designed to support granted the aid. The others ceased operations, changed their regional development and job creation has positive direct name, or were bought by other companies. In their analysis of effects on employment and, to some extent, on investment, and firms that received rescue or restructuring state aid in 15 EU it generates positive spillovers—in terms of employment and member states between 1995 and 2003, Chindooroy, Muller, productivity—to nonbeneficiary firms in beneficiary sectors, with and Notaro (2007) find that firms receiving rescue aid were no evidence of market distortions (World Bank forthcoming). less likely to survive than firms that receiving restructuring aid. However, the study is not conclusive in terms of the survival >>> INDIRECT EFFECTS of firms that have received aid compared with the survival of firms that have not received aid. In studying the effects of Empirical assessments of the indirect effects of subsidies and subsidies for SMEs following the Great East Japan Earthquake other government policies are less common, in part because of 2011, Kashiwagi (2019) finds that although subsidies were of the difficulties involved in measurement and the availability effective in the retail sector, they made no significant difference of data. Nevertheless, this area of the literature is growing, in manufacturing and service sectors. It is assumed that this and it overwhelmingly indicates that subsidies often create finding stems from the variations in the degree of private significant market distortions and compromise competition by, support across sectors rather than from variations in supply for example, distorting markups and allocative efficiency and chain disruption. reducing overall welfare. Because of the mixed potential for subsidies to achieve their primary objectives through direct As for the ability of subsidies to increase R&D, the results effects on subsidy recipients, explored earlier, the balance of are broadly positive (Almus and Czarnitzki 2003; Falk 2004; the evidence weighs against the use of subsidies in most cases Guellec and Van Pottelsberghe de la Potterie 2003). Almus as a tool of industrial policy. and Czarnitzki (2003), using matching strategies to study R&D subsidies in eastern Germany, find a positive and significant In an ex post analysis of the impact of certain state aid effect. Hussinger (2008) employs a two-step selection model and measures on competition commissioned by the European concludes that subsidies in Germany are effective in promoting Commission, three key characteristics were identified as having R&D investment. Bloom, Griffith, and Van Reenen (2002) also the greatest impact: (1) the relative size of the aid; (2) the breadth find positive effects, with firms increasing R&D spending by of the aid; and (3) the frequency of the aid (Oxera 2017). In the approximately 1 percent for every 1 percent reduction in the study, each case was investigated comparing two states of the cost of R&D granted through tax incentives. The effects are world: a factual state (the situation that prevails when a shock even greater in a censored panel data regression model with has occurred) and a counterfactual state (the situation that random effects by Parisi and Sembenelli (2003), which finds prevails in the absence of the shock). This approach allows the that a 5 percent reduction in the cost of R&D by means of a research to test whether a given state aid has led to a distortion subsidy can increase R&D activities 7.5–8.8 percent. of competition. The study finds that the impact of the aid on 18 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT competition depends on how these characteristics express themselves in each case. In cases in which the aid is small relative to market size (less than 1 percent of total revenue), the study concludes that the effects on competition are likely to be negligible. For example, in the case of a one-off payment of €80 million to the French substrates manufacturer, Soitec, for its NanoSmart nanotechnology R&D program in 2007, the study finds that the effects on competition were unlikely to be significant because the aid did not have any material impact on market shares, profits, competitors’ R&D spending, market entry, or exit. Correspondingly, where the aid granted is large relative to the size of the market, the effects on competition are significant, such as where the aid amounted to 51 percent of the total revenue of regional airports in southwest England. In addition, when aid is delivered more frequently (such as on an annual basis) in markets characterized by a high degree of entry and exit, it is more likely to distort competition in favor of incumbents. Allocative inefficiencies are common in markets where subsidies are provided, especially if they are not well designed. Investigating the effect of state aid provided to rescue and restructure struggling firms in Slovenia’s manufacturing sector, Schweiger (2011) observes that the aid was effective to the extent that the receiving firms did not exit the market and the aid had a positive impact on market share growth. But because there was no significant impact on TFP growth, Schweiger concluded that the aid was market distorting. Similarly, Bravo-Biosca, Criscuolo, and Menon (2013) find that R&D tax exemptions slow down the reallocation of resources toward more innovative market entrants and are likely to favor incumbent firms. In a study of shipbuilding subsidies in China between 2006 and 2013, Barwick, Kalouptsidi, and Bin Zahur (2019) discover that although the subsidies boosted China’s domestic investment and entry by 270 percent and 200 percent respectively—and China’s world market share by 40 percent—they also attracted inefficient producers, exacerbated the problem of excess capacity, and did not increase industry profits in the long run. Restuccia and Rogerson (2008) find that subsidies, because they distort the allocation of resources across establishments that differ in productivity, can reduce aggregate output and TFP in the range of 30–50 percent. Coppens, Hilken, and Buts (2015) reveal that aid is more likely to distort competition if the aid is granted to incumbent companies in highly concentrated and highly segmented markets. Meanwhile, economic theory suggests that low markups as proxies for competitive pressure can be associated with allocative efficiency and perfect competition. However, subsidies can result in a distorted sense of firm efficiency. When subsidies are present, they logically reduce the cost structure of a subsidized firm—especially when the subsidy scheme under INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 19 analysis is designed to cover investment or operational costs— has majority or minority ownership demonstrate higher markups and so lower markups do not necessarily reflect real productivity when compared with domestic privately owned companies in the performance. Certainly, subsidy beneficiaries having lower overall economy and especially in the manufacturing sector. The markups may suggest that such firms have more leeway to average difference in markup is higher for minority state-owned reduce prices as they need to recover lower real costs. But many companies (28.9 percent) than for fully state-owned firms (20 other factors can influence markups as well, such as size, age, percent). In manufacturing, markups of fully state-controlled firms ownership status, R&D status, and location (Iootty, Pop, and are the highest on average, at 52.7 percent, when compared Pena, forthcoming). Because of the competing interpretations with the reference category (domestic privately owned firms). and the difficulties involved in measuring causality between Nevertheless, although it is difficult to show causality, the fact subsidies and markups, the relationship between subsidies and that the recipients of state aid studied in Romania have lower distortions and competition (as measured through markups) markups may still speak to the fact that subsidized firms— should be interpreted with caution. regardless of their level of state ownership—have more leeway to reduce prices because they need to recover lower costs. As In preparation for the 2019 World Bank report Innovative such, subsidies can contribute to unleveling the playing field China: New Drivers of Growth, a background paper by Iootty between recipients and nonrecipients. and Dauda (2017) assessed the evolution of firm markups in the Chinese economy to shed light on the contribution that more In terms of the impacts of subsidies on overall welfare, the competition could make to productivity growth in the country. The evidence for state aid in EU countries is mixed. Broadly, studies analysis measures how firm markups are related to productivity indicate that the ability of state aid to increase aggregate social and specific firm characteristics, including receipt of subsidies. welfare without distorting competition varies, depending on Based on a micro-level analysis of enterprises between 1998 the characteristics of the market and of the recipients of the and 2013, the study finds that firms receiving income subsidies aid, but there is no one-size-fits-all in terms of the amount of tend to earn a lower markup when compared with firms in the the subsidies in a given market and their effects (Besley et al. same product market that do not receive subsidies. As noted 1999; Collie 2000 and 2002; Harbord and Yarrow 1999). One earlier, this finding is subject to divergent interpretations. Lower study finds that state aid to R&D will increase aggregate welfare markups could be interpreted as a sign of increased efficiency if the spillovers from R&D are large, but it will always decrease and profitability, but this is not necessarily the case. Subsidies aggregate welfare if the spillovers are small (Collie 2005). An ex also reduce the investment costs for firms and distort cost post impact evaluation in Romania showed that a de minimis structures. As a result, cost structures and prices do not reflect state aid scheme designed to incentivize access to finance for real productivity performance.2 micro and small and medium enterprises generated negative spillover effects on nonbeneficiary firms in terms of job creation. In a similar study of markups in Romania between 2008 and This finding suggests that potential job displacement, even if it 2017, Iootty, Pop, and Pena (forthcoming) show that the recipients did not distort competition, led to increased employment and of a state aid scheme to promote regional development and job turnover of beneficiary firms, and it reduced the probability of creation had 80 percent lower markups than comparable firms aided firms closing their activities (World Bank, forthcoming). not granted aid under the program. The firms with the highest Furthermore, the effects on the profits of domestic and foreign markups were more common in sectors such as wholesale and firms depend on the particular characteristics of the market retail, which are classified as “less knowledge intensive services,” (Garcia and Neven 2005). Accordingly, Strohm (2006) argues according to Eurostat, and which tend to be less innovation- that because the overall welfare effects of industrial policies in a driven. The authors advise caution in interpreting these results dynamic environment are difficult to estimate, this justifies the use because they do not represent the totality of state aid schemes of industrial policies only if they do not distort rivalry in otherwise offered by the Romanian government and because estimated competitive markets. Finally, using a panel data set that covers differences cannot be taken as evidence that provision of state 27 EU member states over the period 1992–2011, Tunali and aid always reduces markups. Other firm characteristics may also Fidrmuc (2015) find that state aid is not an effective instrument to be relevant. The study finds that ownership structure may explain foster higher economic growth or overall investment rates. markup differences across firms—that is, firms in which the state 2. According to the study, subsidized firms may have more leeway to reduce prices as they need to recover (lower) costs. However, because the methodology applied does not assess the causal impact of state aid on the markup performance of beneficiaries, this result should not be taken as evidence that provision of state aid is beneficial for markup reduction. 20 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT >> TRADE POLICY Implementation of industrial policy using the sector. In some studies, import quotas have an even stronger tools of trade policy, such as tariffs, import/export negative effect on firm performance than tariffs (Edwards 1998; quotas, local content requirements, or some form of trade- Kim 2000). A notable exception is a study by Nunn and Trefler related subsidy often aims to protect “infant industries” or certain (2010) that shows that tariff protection favoring sectors with domestic industries that governments deem unable to survive higher-skilled workers can lead to higher levels of long-term international competition. However, there is little to no empirical growth in the per capita gross domestic product (GDP). evidence in favor of using such policy as a tool to protect or grow infant industries, and most studies dismiss the approach. Local content requirements, which are typically intended to boost local supply chain linkages, are also negatively associated >>> DIRECT EFFECTS with productivity and competitiveness. Hufbauer et al. (2013) estimate that local content requirements globally affect 2 percent Single industry empirical studies unambiguously conclude of trade across all sectors and reduce it by US$93 million that tariffs may induce short-term growth at the sector level, annually. One cross-country study across multiple sectors finds but that in the long run welfare losses generally exceed short- that local content measures lead to a concentration of domestic term benefits and protected domestic industries are unable to economic activity, undermining the growth and innovation catch up to international peers. Studying protectionist tariffs for opportunities that arise from a diverse economy (Stone, Flaig, the semiconductor industry in Japan, Baldwin and Krugman and Messent 2015). Moreover, the measures did not boost (1986) find that the costs to Japanese consumers outweighed productivity, nor did they improve export competitiveness. the limited maturation benefits experienced by the sector. Luzio Dutz et al. (2017) find that Brazil’s local content requirements and Greenstein (1995) study the effect of protection on the combined with tax exemptions were narrowly effective in microcomputer industry in the 1980s in Brazil. They find that limiting imports, but failed to make the Brazilian car industry although there was a rapid short-term growth, in the long term competitive, resulting in smaller-scale production and higher the sector never caught up with the technological frontier; the consumer prices. Similar results were recorded for Australia’s policy was abandoned in the early 1990s. Rask (1994) examines local content policy in its automotive sector in the 1960s and the case of tariff protection for the Brazilian ethanol industry and 1970s, including reduced employment, technological change, finds no empirical evidence of improved economies of scale and innovation in the sector (Pursell 2001). and very little technical change. In a study of tariff and nontariff protection in 38 industries in Korea, Lee (1995) concludes Most studies argue that the removal of protectionist trade that less government intervention in trade is linked to higher policy generates both intra-firm and intra-industry productivity productivity growth. Supporting this finding, Edwards (1998) gains—for Africa, see Ng and Yeats (1997); Brazil, Muendle uses nine alternative indexes of trade policy across a sample (2004); Chile, Pavcnik (2002); Côte d’Ivoire, Harrison (1994); of 93 advanced and developing countries to show that TFP Korea, Kim (2000); Mexico, Tybout and Westbrook (1995); the growth is faster in more open economies. Similarly, Dovis and former Yugoslavia, Nishimizu and Page (1982). Because firms Milgram-Baleix (2009) find that a 10 percent reduction in tariffs are forced to reduce costs by exposure to, not protection from, results in a 1.4 percent gain in TFP in Spain’s manufacturing foreign competition, foreign competition promotes increased INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 21 efficiency (Tybout 2000). In a study of Spain’s manufacturing The broad trade liberalization in India in 1991 had strong pro- sector, Dovis and Milgram-Baleix (2009) show that a 10 percent competition effects across a variety of industries, as reflected in increase in international penetration rates results in a 2.2 reductions in price–marginal cost margins, and produced some percent increase in productivity at the firm level. In a study of evidence of an increase in the growth rate of overall productivity import liberalization in Morocco, Dutz (1991, 33) finds that it (see Krishna and Mitra 1998). Similarly, considering trade is more likely to drive smaller firms to exit, which, based on liberalization in Turkey, Levinsohn (1993) observes a reduction the positive relationship between firm size and firm efficiency, in markups charged by manufacturing firms because the sector “supports the view that trade liberalization may well result in was exposed to greater international competition. welfare-improving output re-adjustments.” Khandelwal and Topalova (2011) highlight that the positive effects of trade As for allocative efficiencies, studying the effects of trade liberalization on firm-level productivity can be enhanced reform in Ghana, Biggs and Shah (1997) find that as the level through complementary reforms to reduce restrictions on FDI of protection declines, overall allocative efficiency improves and reduce or remove licensing requirements. in the market. A study of the effects of trade liberalization on productivity in Chile indicates that although within-plant productivity improvements could be attributed to liberalized >>> INDIRECT EFFECTS trade for the plants in import-competing sectors, aggregate Considering the broader effects of trade policy on the productivity improvements stem from the reshuffling of economy and competition in the market, the empirical results of resources and output from less to more efficient producers studies again skew against protectionist policies. For example, in each sector (Pavcnik 2002). Trade liberalization in Brazil, Australia’s local content schemes in the automotive sector by increasing competition from abroad, has been shown to in the 1960s and 1970s are thought to have been strongly increase the likelihood of inefficient firms exiting the market, counter-competitive, resulting in ex-factory prices 85 percent thereby contributing positively to a more efficient allocation of higher than the duty-free prices of imported cars (Pursell 2001). resources in the economy and greater aggregate productivity In another in-depth analysis of local content requirements in (Muendler 2004). the automotive sector, this time in Brazil, Sturgeon, Chagas, and Barnes (2017) find that although competition among In terms of the indirect effects of trade reform on overall domestic producers increased (the policy attracted new market welfare, in his analysis of the U.S. tin industry in the 1890s, entrants and increased investments from existing producers), Irwin (2000) finds that even though tariff protection increased prices ultimately went up because domestic automakers were the industry’s maturity by about 10 years, the net effect on protected from import competition. welfare was negative because the cost to consumers was too high. In much the same way, Baldwin and Krugman (1986) find Several studies demonstrate the positive relationship that Japan’s home market protections for the semiconductor between trade liberalization and reducing markups, which industry produced more costs than benefits for consumers. can stem both from increased competition between firms and Head (1994) reveals that for the U.S. steel rail industry, tariff improved resource allocation in the economy. For example, protections hurt consumers in both the short and long run, industries subjected to the most trade protection in Côte and the effects on overall welfare were extremely small, d’Ivoire had the highest markups and productivity was up to although positive. four times lower than less protected sectors (Harrison 1994). 22 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT >> S TAT E - O W N E D E N T E R P R I S E S The nationalization of business through state- Bank 2019). These effects are often a result of direct or indirect owned enterprises and other forms of state holdings benefits provided to SOEs by the government that are not in businesses are popular tools in national industrial policy. offered to private firms, which creates an unlevel playing field, Recent estimates suggest that SOE assets are worth US$45 distorts competition, and skews firm incentives (OECD 2011). trillion, almost half of global GDP, up from around US$13 trillion in Benefits include subsidization, preferential tax treatment or 2000 (IMF 2020). Like subsidies, the most common justifications exemptions, in-kind benefits, and concessionary financing and for SOEs are the need to compensate for market failures, the guarantees. As a result, SOEs often operate within soft budget advancement of strategic objectives, and the promotion of constraints, secure in the knowledge that they will continue to development objectives (World Bank 2019). When they are receive government support regardless of their level of return managed and regulated correctly, SOEs in the appropriate context on investment or losses suffered (Kornai, Maskin, and Roland have the potential to act as important drivers of economic growth 2003). This security reduces incentives to increase efficiency, given their size, mission, and strategic vision. For example, if productivity, and quality in the goods or services delivered SOEs are major players in a given market, they can drive the (Kowalski et al. 2013). adoption of higher standards and production of higher-quality goods and services along entire supply chains. SOEs are often a >>> DIRECT EFFECTS natural choice for industries with significant economies of scale, where a single monopolist producer or supplier is needed to In empirical studies, state ownership is rarely associated achieve optimum efficiency (Kowalski et al. 2013). Examples are with productive efficiency. Zhang, Zhang, and Zhao (2001), in frequently found in network sectors, such as energy provision, studying the effects of ownership and market competition on communications, or transport. Particularly where network SOEs Shanghai-based firms between 1996 and 1998, observe that operate efficiently, they can lead to significant positive spillovers SOEs were the least efficient in the sample. The study also to the rest of the economy through the provision of high-quality, finds evidence (albeit weak) of learning and improvement of efficient, and optimally priced outputs. management techniques among SOE managers who operate in environments with stronger competition. Goldeng, Grünfeld, Correspondingly, inefficient and poorly exercised state and Benito (2008) use returns on assets as well as costs relative ownership can have significant negative effects on economies to sales revenue to study firm performance in markets where by creating additional risks for public finances, risks to the SOEs and privately owned companies compete. They find that financial sector through state-owned banks, and risks to SOEs perform significantly worse than privately owned firms. productivity and economic growth through spillovers from More recently, the International Monetary Fund (IMF), drawing inefficient SOEs to private firms (Böwer 2017; Shapiro and from a sample of about 1 million firms in 109 countries, finds Globerman 2012). The presence of SOEs in the market can that SOEs are less productive than private firms by one-third on unintentionally lead to adverse effects and market distortions, average, in part because of poor governance. In countries with which can be broadly categorized into three groups: (1) effects perceived lower corruption, SOE productivity is more than three of SOEs on market functioning and private sector participation; times higher than that in countries where corruption is seen as (2) effects of SOE performance on development outcomes; severe (IMF 2020). and (3) effects of domestic SOEs on global markets (World INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 23 Cornett et al. (2005) examine government ownership and involvement in a country’s banking system in East Asian countries between 1989 through 2004. They find that prior to 2001 state-owned banks were less profitable and had greater credit risk than privately owned banks. These trends were most pronounced in countries with the greatest government involvement and political corruption in the banking system. In addition, state-owned banks were worse off during the Asian financial crisis (1997–2000), experiencing greater deterioration in cash flow returns, core capital, and credit quality than privately owned banks. However, during the postcrisis period of 2001–04, state-owned banks quickly caught up with privately owned banks on cash flow returns, core capital, and nonperforming loans. By contrast, Chen, Firth, and Xu (2009) find that between 1999 and 2004 Chinese SOEs controlled by the central government through the State-owned Assets Supervision and Administration Commission (SASAC) exhibited much better overall financial performance than privately owned companies as well as those partly state-owned and managed through state asset management bureaus (SAMBs). SASAC-controlled SOEs are usually nationwide companies involved in various industries, and although owned, controlled, and closely monitored by the central government, they have substantial autonomy over their activities. In addition, they are able to invest in listed firms and often hold substantial shares that give them outright or de facto control. By contrast, SAMBs are established at the local level of provincial cities and are shareholding institutions that belong to the state, tasked with managing state assets. According to the study by Chen, Firth, and Xu (2009, 180), SOEs partly owned or managed by SAMBs are subject to weaker supervision and management, in part because of the lack of skills of SAMBs (and their officials) and the lack of incentives associated with firm performance—that is, SOEs are “bereft of leadership and oversight.” As for the comparatively poor performance of privately-owned companies, Chen, Firth, and Xu (2009, 180) observe that “market-oriented state shareholders may be the most suitable controlling owners of firms in countries with weak institutional environments.” Another cross-sectoral study of SOEs in central, eastern, and southern Europe finds that SOEs (1) generate less revenue per employee; (2) pay higher wages than private companies; and (3) not surprisingly are significantly less profitable, with the driving factor being the inefficient use of resources, especially labor (IMF 2019). This finding reinforces earlier research—a global study of very large SOEs highlighted that they are significantly less profitable, more highly leveraged, and more labor-intensive than private sector comparators (Dewenter and Malatesta 2001). Interestingly, the solution is not necessarily privatization. 24 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT The same study finds little evidence that privatization itself and Mok (2013, 24), “a public job typically comes at the cost enhances profitability. Instead, government restructuring efforts of a private-sector job and therefore does not reduce overall prior to privatization sales can improve profitability, with no unemployment.” In several cases, privatization of SOEs has further efficiency gains observed thereafter. Indeed, it appears been shown to lead to overall increases in employment, even that the effects of state ownership on efficiency can persist even if there are layoffs in the former SOEs themselves (Davis et al. following privatization. A study of SOE privatization efforts in 2000; Earle and Shpak 2019; Estache and Trujillo 2008). For China shows that although the profitability improved following example, a study of the Zambian air transport sector reveals that privatization, privatized SOEs still significantly underperform the emergence of two new private airlines following the collapse compared with their private counterparts (Harrison et al. 2019). of the state-owned provider led to higher overall employment in the sector (Kikeri 1998). The fact that SOEs often have access to subsidies and public funds also appears to have little impact on financial >>> INDIRECT EFFECTS performance. A study of current Chinese SOEs, former SOEs, and privately-owned firms observes that state-owned firms When SOEs receive special advantages, not only does this receive more subsidies and lower interest rates than former unlevel the playing field vis-à-vis private firms, but SOEs may SOEs that have been privatized, and former SOEs are favored achieve market positions not warranted by the efficiency of their relative to firms that have always been held privately (Harrison production. Such a situation shifts production away from the et al. 2019). Nevertheless, another study of Chinese SOEs over most efficient producers and distorts resource allocation more the last decade demonstrates that those receiving government- broadly in an economy, and it can lead to overcapacities and mandated financial assistance continue to sustain losses, and increased production, regardless of the market needs. In their the public debt attributable to SOEs has continued increasing, study of SOEs in Shanghai between 1996 and 1998, Zhang, often to unsustainable levels (Molnar and Lu 2019). Zhang, Zhang, and Zhao (2001) observe that although SOE exposure Zhang, and Zhao (2001) find that even adjusting for capital to foreign competition is positively associated with efficiency, structure, taxes, and the welfare burdens of Chinese enterprises, no relationship is observed between the degree of domestic SOEs still exhibit poor financial performance attributable to “soft competition and productive efficiency. Massive government loans,” and their profit growth is markedly slower than that for stimulus programs to Chinese SOEs during the 2007–08 firms with different ownership structures. financial crisis were associated with inefficient outcomes. Indeed, despite the assistance, Chinese SOEs continued to Most recently, across a sample of about 1 million firms in operate with losses (Wildau 2016). Moreover, lending directed 109 countries, SOEs were found to be less productive than to SOEs resulted in overcapacities and the creation of national private firms by one-third on average (IMF 2020). The primary champions, which increased production and infrastructure factors were weak SOE accountability and poor countrywide regardless of market needs (OECD 2019). Buehler and governance. By contrast, in countries with strong countrywide Wey (2013) argue that state ownership plays only a subtle governance, the productivity gap was only 7 percent. This role in crowding out private investment. Public investment finding is reinforced by Baum et al. (2019), who also find strategically crowds out private investment in markets where that SOEs perform markedly worse than their private sector the private firm regards investments as strategic substitutes counterparts in countries with high levels of corruption or and private investment is undesirable from the state-owned poor fiscal transparency (even after controlling for a country’s firm’s perspective. Otherwise, “crowding out will either also level of development). The same study also demonstrates be practiced by a private firm, or public investment will boost that SOE governance reforms can generate significant gains private investment” (Buehler and Wey 2013, 329). in performance. A study of over 6,000 SOEs in 11 EU member states As for whether SOEs make a meaningful contribution to higher finds that the efficiency of resource allocation by SOEs lags employment in an economy, the results are also disappointing, those of private firms in most sectors, with substantial cross- showing no positive effects on employment in the aggregate. country variation (Böwer 2017). These effects are considered Although SOEs account for a large share of employment more pronounced in developing economies because of their worldwide (OECD 2017), a study of labor market data from 194 smaller markets, comparatively weak private sectors, weaker countries and the effects of public sector employment on private government regulation and competition enforcement, and sector employment reveals that the public sector employment weaker SOE governance and institutional frameworks (World completely crowds out private sector employment and does Bank 2019). Considering SOEs in the steel sector across not help to reduce unemployment overall. According to Behar countries, Mattera and Silva (2018) find that not only are SOEs INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 25 associated with poorer economic performance and higher levels of indebtedness than private enterprises, but they also have contributed to increasing overcapacity in the sector. SOE inefficiencies, particularly where SOEs are sheltered from competition, are also associated with lower levels of development. One study finds that a 5 percent increase in SOE efficiency in the Arab Republic of Egypt could result in a 5 percent increase in GDP (Smith and Trebilcock 2001). Estache and Fay (2009) find that poor service delivery in the utilities sector and a lack of effective infrastructure provided by SOEs constrains investment and economic growth, with a disproportionate effect on poor people. A study of China finds that productivity growth attributable to China’s SOE reform is mainly due to improvements in resource allocation (Huang 2019). Brandt, Tombe, and Zhu (2013) also point out that resource misallocation reduced China’s nonagricultural productivity by an average of 20 percent during 1985–2007, with over half of the loss attributable to the misallocation of capital between state and nonstate sectors within provinces. Preferential treatment and the resulting market position of SOEs can facilitate anticompetitive conduct by SOEs such as predatory pricing and other behavior aimed at excluding current competitors or preventing the entry into markets in which they operate (World Bank 2019). In their analysis of markups in Romania between 2008 and 2017, Iootty, Pop, and Pena (forthcoming) show that, controlling for other firm characteristics, ownership is the most relevant in explaining differences in markups (as proxies for competitive pressure). In Romania, state-controlled companies tend to exhibit the highest markup premiums when compared with domestic privately-owned companies across the economy and especially in the manufacturing sector: 29 percent higher for minority state-owned companies and 20 percent higher for fully state- owned companies. SOEs are also vulnerable to political capture by ruling parties, which can lead to distorted decisions in the market. For example, the low interest rates granted by state-owned banks in Italy were not driven by enhanced efficiencies on the part of the bank or by a particular social purpose. Instead, the party affiliation of senior management most closely correlated with the interest rate discount given in different provinces. And interest rates were lowest when the political affiliation between management and the area from which the firm was borrowing was the strongest (Sapienza 2004). Meanwhile, Ferrari, Mare, and Skamnelos (2017) observe that on-lending by state development–oriented institutions through other financial intermediaries limits the scope for political interference and competition distortion, while also enabling more resources to be transferred at lower cost by leveraging the infrastructure of other institutions. 26 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT >> PUBLIC PROCUREMENT In an effort to protect local companies, support and as domestic participants (Carboni, Iossa, and Mattera 2017). stimulate infant industries, create employment, and Overt barriers include the imposition of tariffs on the imports support undeveloped regions, governments may also pursue of goods and services by foreign firms (which increases their discriminatory procurement practices that favor local firms over costs relative to local players), set-aside schemes that induce foreign firms (Ssennoga 2006). Like trade policy, however, more procurement agencies or contracting authorities to place a share open procurement practices that foster competition between local of their purchases with smaller (usually local) businesses, buy- and foreign firms have been shown to reduce purchasing costs, national programs that require certain goods and services to be encourage innovation, and lead to skill and technology transfer sourced locally, price preferences that favor local suppliers, and from international best practices and experiences. Cecchini direct contracting with local suppliers outside of the procurement (1988) highlights three major areas of cost savings stemming tender process or limitations or prohibitions on foreign firms in from open and transparent public procurement: (1) public certain types of procurement. Covert barriers include barriers authorities are able to buy from the cheapest (foreign) suppliers embedded in tender documentation that can limit the participation (static effect); (2) the inclusion of foreign companies leads to of foreign firms by, for example, including obligations to use only downward pressure on prices charged by domestic firms in local inputs, local bureaucratic requirements that may be difficult previously closed sectors (competition effect); and (3) increasing for foreign firms to fulfill, and restrictions on the participation of economies of scale emerge as the industry reorganizes under foreign firms to those that have local subsidiaries in a country. the pressure of new competitive conditions (restructuring effect). Language barriers have also been cited as another major obstacle to the participation of foreign firms in procurement With this in mind, a number of international agreements are tenders (European Commission 2012). aimed at removing barriers to procurement for foreign firms. For example, the Agreement on Government Procurement (GPA), According to the EU’s Global Trade Alert database, public originally signed in 1981 under the auspices of the World Trade procurement barriers are one of the top five most frequently used Organization (WTO), involves 20 parties and 46 WTO members discriminatory trade instruments, with 533 harmful interventions (counting the European Union and its 27 member states, as well introduced between 2009 and 2017. Of these, localization as the United Kingdom). It aims to “mutually open government requirements accounted for 81 percent of all recorded government procurement markets among its parties” and to favor and promote interventions in procurement (although approximately 79 percent and ensure “open, fair and transparent conditions of competition” of those were in the United States). Otherwise, price preference in government procurement. But despite the GPA and similar margins are the most frequently used instrument for direct provisions in regional and bilateral free trade agreements, discrimination, followed by market access restrictions. In 2017 discrimination persists, and transparency in procurement remains Germany and China were the countries most frequently affected a highly sensitive political issue for many governments. by discriminatory measures—402 and 397 cases, respectively (Kutlina-Dimitrova 2018). Barriers to procurement for foreign firms can be overt—set out explicitly in the law—or they may be covert—that is, government The empirical evidence on the effects of overt and covert measures that impede access to procurement or render it measures of discriminatory procurement is more mixed than in impossible for foreign participants to compete on the same terms other areas of industrial policy. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 27 >>> DIRECT EFFECTS In general, economic arguments in favor of using discriminatory procurement as a tool to boost local industry have been shown to hold in small numbers or in imperfectly competitive settings where profits and rents are to be shifted (Mattoo 1997). One can argue that discrimination is rational simply because foreign profits do not enter domestic welfare, and so there are indisputable direct benefits for domestic firms (Branco 1994). The “Buy American” policy on public procurement, for example, was found to have a significant impact in curtailing foreign supplies (Lowinger 1976). More recently, in Japan it has been shown that 40 percent of SMEs would have exited the procurement market but for the government’s set-aside program, which devotes half of the procurement budget to SMEs (Nakabayashi 2013). Moreover, the higher procurement costs were outweighed by the higher levels of competition that were preserved in the market. In a study of bid preferences for smaller firms in California auctions for road construction contracts (small businesses received a 5-percent bid preference in auctions for projects using only state funds and no preferential treatment on projects using federal aid), Marion (2007) shows that they lead to an increase in procurement costs, likely because participation by larger, low cost firms is smaller in such auctions. In addition, where procurement involves important monitoring or contract compliance issues, the likelihood of performance by local firms may be higher due to opportunity costs—namely, the threat of losing future repeat business. This may be a meaningful benefit for procuring entities and justify local firm discrimination (Rotemberg 1993). In circumstances in which local firms have a cost disadvantage in the relevant product or service markets and only a limited number of firms (foreign and domestic) bid for the contract and in which local firms are subject to preferential price treatment, foreign participants could be forced to lower their bids, leading to lower costs for the procuring entity (McAfee and McMillan 1989). 28 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT work to raise prices or reduce quality because manufacturers >>> INDIRECT EFFECTS would otherwise have made different choices. Discriminatory procurement has also been found to be a driving force behind As for the indirect effects of public procurement based on domestic and international industrial specialization by countries local content rules, the evidence indicates that it can in limited (Brülhart and Trionfetti 2001, 2004). circumstances be welfare-enhancing for society. In such contexts, shifting demand to domestic firms may reduce price-cost In addition, when competition is suppressed in procurement margins as domestic output expands (Chen 1995). Considering markets, it can result in cartel behavior in the form of bid a ban on government purchases of foreign suppliers, Baldwin rigging. This behavior reduces the purchasing power of public and Richardson (1972) find that when domestic supply exceeds funds because of higher costs, thereby lowering the ability of government demand at free trade prices, a ban on foreign governments to deliver public goods and services (World Bank suppliers has no effect on domestic prices, net imports, and 2017). Clarke and Evenett (2003) find that even a small reduction national welfare. By contrast, when domestic supply is less than in bid rigging could lead to price reductions of 15 percent on 1 the government demand at free trade prices, a procurement ban percent of government contracts, which in certain countries was raises the price paid by the government and domestic output, significantly more than the average annual operating budget of reducing total imports and national welfare. In addition, in many national competition agencies (including in India, Kenya, South contexts government demand will be too small to meaningfully Africa, Tanzania, and Zambia). Bid rigging by four pharmaceutical affect outcomes (Evenett and Hoekman 1999). distributors in South Africa from 1998 to 2007 was found to have increased prices by 10–15 percent, as compared with a Although there may be situations in which discriminatory brief noncollusive period in 2001. Also in South Africa, Khumalo, procurement has the potential to lower procurement costs Mashiane, and Roberts (2014) find that a South African cartel and it may make sense from a practical or public preference in precast concrete products (pipes, manholes, channels and perspective, many other studies suggest that the benefits are drains, railway sleepers, poles, toilets, bus shelters, and palisade likely to be modest at best. fencing) has resulted in overcharges in the range of 16.5–28 percent in Gauteng and 51–57 percent in KwaZulu-Natal. Several studies argue that discriminatory procurement policies generate excessive costs for procuring entities and inefficiencies Reforms of the Russian procurement system, including laws on the supply side of the procurement process that outweigh making bid rigging punishable by imprisonment for up to three any welfare gains to society (Cox and Furlong 1997; Deltas and years, resulted in budgetary savings estimated at more than Evenett 1997; Uttley and Hartley 1994). Governments will likely €26.5 billion between 2006 and 2010 (UNCTAD 2012). The pay higher prices for procured goods and services because average number of bidders also increased following the reform, without foreign competition local firms have little to no incentive from 9 to 26. An OECD (2003) report documents a number of to invest in technology or efficiency-enhancing improvements instances in which countries experienced significant public in production. As a result, product and service choice and savings following the adoption of transparent and competitive quality may be more limited in protected markets. One study procurement procedures and measures to combat bid rigging. finds that firms in protected markets are characterized by low For example, Guatemala achieved savings of 43 percent in the product specialization, resulting in uneconomical product ranges, cost of purchasing medicines; the Karachi Water and Sewerage short product runs, and higher costs (Uttley and Hartley 1994). Board in Pakistan saved Rs 187 million (US$3.1 million); Japan Arguably, local content requirements embedded in procurement saw a 20 percent decline in prices across 18 tenders; and the tenders force manufacturers to alter the composition of the U.S. Department of Defense saved 23 percent. products they make. Domestic content restrictions can then INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 29 4. >>> Combining industrial and competition policy The weight of the evidence reviewed in the preceding section indicates that industrial policy generally fails to achieve significant positive direct effects, and it frequently risks distorting competition in the market: • Subsidies may or may not increase productivity and innovation, depending on how they are designed. For example, subsidies appear to have more positive effects on productivity when they are more dispersed—that is, subsidies for R&D often produce more R&D, although the effects appear to vary based on the size of the firm and aid intensity. On the other hand, subsidies are also associated with distortions of competition, including allocative inefficiencies and higher markups. • Protectionist trade policies tend to reduce rather than increase productivity and efficiency over the medium to long term. For example, although higher tariffs may induce short- term growth at the sector level, studies indicate that there are welfare losses in the long run because protected industries are unable to catch up to international peers. As trade protection declines, allocative efficiencies generally improve in associated markets and markups are reduced. • Preferential treatment of SOEs and weak oversight are linked to SOE inefficiency and lower profitability. Although SOEs can play a key role in delivering goods and services, especially in situations of market failures, SOEs do not appear to have positive effects on aggregate employment, and they increase the financial burdens of the state. In many cases, SOEs are associated with allocative inefficiency, higher markups, overcapacity, and lower levels of development. • Discrimination in government procurement has mixed effects. Although favoring domestic firms may have positive effects for those firms, the evidence tends to suggest that those effects are outweighed by the higher costs generated for the procuring entities, which have negative implications for overall welfare and can foster anticompetitive behavior such as bid rigging. The ability of industrial policy to achieve its direct objectives appears to be relatively weak (direct effects), and there is growing evidence that it can lead to market distortions (indirect effects). And particularly because the overall welfare effects of industrial policies in a dynamic environment are difficult to estimate, there is a strong argument that industrial policies should aim to avoid distorting rivalry in otherwise competitive markets (Strohm 2006). INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 31 Evidence increasingly points to a new “mode” of industrial is perhaps precisely what can make each effective in different policy that supports or increases competitive pressure between market contexts. firms. Recent papers (some of which were highlighted in section 3) point out that when industrial policies are designed In several instances, industrial policies that target specific in a competition-enhancing manner, they can mitigate the sectors or firms have been designed to promote efficiency negative consequences in the economy, such as those caused and innovation and to encourage competition among domestic by financial or production frictions, and have significant positive firms. For example, in China in the 1970s and 1980s SOEs in effects (Itskhoki and Moll 2019; Liu 2019). For example, Aghion, the textile sector that reached their production quotas could Boulanger, and Cohen (2011, 6) argue that “sectoral aid that sell their “above norm” products at 15 percent above or below enhances within-sector competition by not focusing on one (or the regulated prices. Xiaojuan (2002) finds that this effectively a small number) of firms, is more likely to be growth-enhancing relaxed price controls to allow for more competition, and than more concentrated aid.” Using data on medium and large firms became more competitive as a result, increasing their companies in China between 1998 and 2007, Aghion et al. output, reducing prices, and speeding up development of new (2015) show that when industrial policies such as subsidies or products and technology. Along the same lines, Cherif and tax holidays are directed to competitive sectors or are designed Hasanov (2019) argue that the Asian Miracle was the result of to preserve or increase competition (such as by inducing entry an ambitious technology and innovation policy combined with or encouraging younger enterprises), the effects on productivity competition, specifically (1) supporting domestic producers or productivity growth are greater. The study finds that although in sophisticated industries, beyond their initial comparative higher subsidies or tax holidays are associated with higher advantage; (2) preferring recipients that were export-oriented; productivity in initially competitive sectors, the results are mixed and (3) pursuing fierce competition with strict accountability. or negative for loans and tariffs. The authors thus conclude These principles favored more competition and autonomy of the that instead of “picking winners” and distorting rivalry, there is private sector, indicating how well-designed industrial policies virtue in picking sectors that are already competitive in order can complement competition. to enhance productivity and productivity growth. This finding is supported by Domadenik, Koman, and Prasnikar (2018), who To achieve complementarity between industrial policy and find that when subsidies were more widely dispersed within competition, interventions need to be carefully designed and particular sectors, they increase productivity growth by 0.03 scrutinized in order to align them with competition principles percentage points. These findings directly undermine the notion (figure 2). of industrial policy that targets specific firms and seeks to create national champions as a means of driving growth. In the subsidy context, to create the largest productivity gains and spur innovation, the evidence suggests that subsidies Thus industrial policy can be reconceived as a tool to support be designed in a manner that is efficiency-enhancing and competition. Geroski (2005) supports this view, arguing that promotes competition between firms. A comprehensive subsidy the “competitiveness” industrial policy proponents aspire control framework administered by an independent agency can to can only be achieved, realistically, through the kind of help governments achieve this balance to ensure measures “competitiveness” that competition policy actually strives to are appropriate to achieve their purported goals, while also create. Likewise, Aghion et al. (2015, 1) argue that “there can minimizing distortions to competition and free trade, and to be complementarity [emphasis in original] between competition ensure that no less distortive measure(s) would be more and suitably designed industrial policies in inducing innovation effective, appropriate, or cost-efficient. Competition-enhancing and productivity growth.” They also find when a large number subsidies target less concentrated sectors and can include of firms in a sector with a low degree of concentration receive support for SME capacity building and creating supplier linkage state aid, innovation and productivity growth are enhanced. programs to connect domestic SMEs with larger firms and FDI Furthermore, Aghion, Dewatripont, and Rey (1997) show that (World Bank 2020). For example, between 2000 and 2002 the industrial and competition policies have the opposite effects on Czech Republic’s National Supplier Development Program for firms, depending on whether they are “profit-maximizing” firms the electronics and automotive sectors used targeted training (with efficient managers) or “conservative” firms (with managers to improve the competitiveness of Czech SMEs and raise local seeking to maintain personal benefits and minimize efforts). content in these sectors. Within 18 months of completion of the Competition policy has a negative effect on profit-maximizing program, one-third of participants had gained new business, firms and a positive effect on conservative firms, while industrial and the share of components sourced from SMEs in these policy has the exact opposite effect in each case. As such, sectors increased from a rate of 0–5 percent at the start to 2.5– striking the right balance between the two policy approaches 30 percent by 2004 (Malinska and Martin 2000–2002). 32 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Protective trade policy should be approached in much the distortions created by preferential treatment to SOEs and same way and designed in a manner that promotes competition their participation in the market. Exclusive benefits for SOEs, between firms domestically and enables domestic firms to such as preferential financing, credit guarantees, subsidies, or compete with international firms in the medium to long term. exclusive rights, should be scrutinized, and wherever possible Higher import tariffs should therefore be time-limited and their they should be removed or extended to other actors in order to effects on domestic industries closely monitored to ensure the level the playing field between SOEs and private companies. measures generate higher cumulative benefits than costs. Furthermore, subjecting SOEs to strong corporate governance Governments may also consider the need for domestic firms frameworks and accountability mechanisms is crucial to aligning to be exposed to imports and foreign firms in order to promote operational incentives for SOEs and ensuring public funds are innovation, as well as knowledge and technology transfer. not used to cross-subsidize commercial activities. To achieve this, protectionist tariffs or export taxes could be removed or lowered gradually over time to allow domestic firms Finally, although discriminatory procurement policies may time to adjust, although the political economy of such steps be politically appealing and produce limited benefits in certain may be challenging. In some cases, quantitative restrictions, circumstances, their risks should be carefully evaluated in such as import quotas, may be more appropriate and easier to each context. Discriminatory procurement has been shown design so that their protective effects decline automatically over to raise prices for procuring entities, encourage collusive time (Melitz 2005). practices, reduce technology and knowledge transfer from international markets, and result in poorer good and service Where governments choose to participate directly in markets delivery. Particularly in the developing country context, there through SOEs, it is important to adhere to the principle of may be greater potential to deliver on social and economic competitive neutrality and ensure that all enterprises, public or objectives through public procurement that is open to foreign private, domestic or foreign, face the same set of rules.3 The participants in a competitive, transparent, and nondiscriminatory effective implementation of competitive neutrality reduces the bidding process. risk of anticompetitive behavior by SOEs as well as market > > > F I G U R E 2 - Industrial and competition policies: Links and effects Competition policy Industrial Policy Pro- Competitive Effective Subsidies Trade policy SOEs Procurement competitive neutrality competition • Policy-based • Time limited • Subsidiarity • Open regulation law objectives (e.g., infant role of the • Transparent and policy enforcement • Sector- industry state in • Nondiscrim- Market specific protection) markets inatory • Efficient • Monitor based on clear criteria or (achieve market rationale processes intended effects (and • Competitive goals, with effects on neutrality Failure? minimal related • Transparency distortions) markets) Boost competition and market contestability IMPROVE PRODUCTIVITY AND INNOVATION: • Productive • Allocative • Dynamic efficiency efficiency efficiency (internal firm (allocation (innovation to capability) of resources reduce unit cost between firms) of production) Source: World Bank. Note: SOEs = state-owned enterprises 3. For a detailed discussion, see generally OECD (2011). INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 33 5. >>> Conclusion The empirical record generally weighs against the efficacy of industrial policy at achieving its primary objectives (direct effects). Industrial policy fails when it targets individual firms at the expense of others with a view toward reinforcing or strengthening market position to create national champions and unlevel the playing field. A growing body of literature also demonstrates the anticompetitive effects of industrial policy and its propensity to create market distortions (indirect effects). In other words, when not done right, industrial policy can do more harm than good to markets and overall welfare. One way of reducing or even avoiding the deleterious effects of industrial policy is to ensure that it is designed and implemented in a manner that addresses market failure, supports competition between firms, and promotes efficiency. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 35 6. >>> References INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 37 Acemoglu, D., P. Aghion, L. Bursztyn, and D. Hemous. 2012. “The Environment and Directed Technical Change.” American Economic Review 102 (1): 131–66. Acemoglu, D., P. Antràs, and E. Helpman. 2007. “Contracts and Technology Adoption.” American Economic Review 97: 916–43. Ades, A., and R. Di Tella. 1997. “National Champions and Corruption: Some Unpleasant Interventionist Arithmetic.” Economic Journal 107 (443): 1023–42. Aghion, P., J. Boulanger, and E. Cohen. 2011. “Rethinking Industrial Policy.” Bruegel Policy Brief 2011 (4): 1–8. Aghion, P., A. Dechezleprêtre, D. Hémous, R. Martin, and J. van Reenen. 2010. “Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry.” NBER Working Paper No. 18596, National Bureau of Economic Research, Cambridge, MA. Aghion, P., M. Dewatripont, L. Du, A. Harrison, and P. Legros. 2010. “Industrial Policy and Competition.” Working paper, Harvard University, Cambridge, MA. Aghion, P., M. Dewatripont, L. Du, A. Harrison, and P. Legros. 2015. “Industrial Policy and Competition.” American Economic Journal: Macroeconomics 7 (4): 1–32. Aghion, P., M. Dewatripont, and P. Rey. 1997. “Corporate Governance, Competition Policy and Industrial Policy.” European Economic Review 41 (3–5): 797–805. Aghion, P., and R. Griffith. 2008. Competition and Growth: Reconciling Theory and Evidence. Cambridge, MA: MIT Press. Aiginger, K. 1997. “The Use of Unit Values to Discriminate between Price and Quality Competition.” Cambridge Journal of Economics 21 (5): 571–92. Alesina, A., A. Silvia, N. Giuseppe, and F. Schiantarelli. 2005. “Regulation and Investment.” Journal of the European Economic Association 3 (4): 791–825. Alexander, B. 1994. “The Impact of the National Industrial Recovery Act on Cartel Formation and Maintenance Costs.” Review of Economics and Statistics 76 (2): 245–54. Almus, M., and D. Czarnitzki. 2003. “The Effects of Public R&D Subsidies on Firms’ Innovation Activities: The Case of Eastern Germany.” Journal of Business and Economic Statistics 21 (2): 226–36. Badinger, H., and T. Url. 2012. “Export Credit Guarantees and Export Performance: Evidence from Austrian Firm-Level Data.” WIFO Working Paper No. 423, Austrian Institute of Economic Research, Vienna. Baldwin, R., and P. Krugman. 1986. “Market Access and International Competition: A Simulation Study of 16K Random Access Memories.” NBER Working Paper No. 1936, National Bureau of Economic Research, Cambridge, MA. Baldwin, R., and J. D. Richardson. 1972. “Government Purchasing Policies, Other NTBs, and the International Monetary Crisis.” In Obstacles to Trade in the Pacific Area, edited by H. English and K. Hay. Ottawa: Carleton School of International Affairs. Barwick, P. J., M. Kalouptsidi, and N. Bin Zahur. 2019. “China’s Industrial Policy: An Empirical Evaluation.” NBER Working Paper No. 26075, National Bureau of Economic Research, Cambridge, MA. Baum, A., C. Hackney, P. Medas, and M. Sy. 2019. “Governance and State-Owned Enterprises: How Costly Is Corruption?” IMF Working Paper No. 19/253, International Monetary Fund, Washington, DC. Beason, R., and D. Weinstein. 1996. “Growth, Economies of Scale, and Targeting in Japan (1955–1990).” Review of Economics and Statistics 78 (2): 286–95. Behar, A., and J. Mok. 2013. “Does Public-Sector Employment Fully Crowd Out Private-Sector Employment?” IMF Working Paper No. 13/146, International Monetary Fund, Washington, DC. 38 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Bergstrom, F. 2000. “Capital Subsidies and the Performance of Firms.” Small Business Economics 14 (3): 183–93. Besley, T., P. Seabright, K. Rockett, and P. B. Soronsen. 1999. “The Effects and Policy Implications of State Aid to Industry: An Economic Analysis.” Economic Policy 14 (28): 15–53. Bianchi, P., and S. Labory. 2006. “Empirical Evidence on Industrial Policy Using State Aid Data.” International Review of Applied Economics 20 (5): 603–21. Biggs, T., and M. Shah. 1997. “Trade Reforms, Incentives on Ground and Firm Performance in Ghana.” Discussion Paper Series, RPED No. 105, Regional Program on Enterprise Development, World Bank, Washington, DC. Bloom, N., R. Griffith, and J. Van Reenen. 2002. “Do R&D Tax Credits Work? Evidence from a Panel of Countries 1979–1997.” Journal of Public Economics 85 (1): 1–31. Bouis, R., and R. Duval. 2011. “Raising Potential Growth after the Crisis: A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond.” OECD Economics Department Working Paper No. 835, Organisation for Economic Co-operation and Development, Paris. Bourlès, R., G. Cette, J. Lopez, J. Mairesse, and G. Nicoletti. 2010. “Do Product Market Regulations in Upstream Sectors Curb Productivity Growth: Panel Data Evidence for OECD Countries.” OECD Economics Department Working Paper No. 791, Organisation for Economic Co-operation and Development, Paris. Böwer, U. 2017. “State-Owned Enterprises in Emerging Europe: The Good, the Bad, and the Ugly.” IMF Working Paper WP/17/221, International Monetary Fund, Washington, DC. Branco, Fernando. 1994. “Favoring Domestic Firms in Procurement Contracts.” Journal of International Economics 37: 65–80. Brandt, L., T. Tombe, and X. Zhu. 2013. “Factor Market Distortions across Time, Space and Sectors in China.” Review of Economic Dynamics 16 (1): 39–58. Bravo-Biosca, A., C. Criscuolo, and C. Menon. 2013. “What Drives the Dynamics of Business Growth?” OECD Science, Technology and Industry Policy Paper No. 1, Organisation for Economic Co-operation and Development, Paris. Bronzini, R., and E. Iachini. 2014. “Are Incentives for R&D Effective? Evidence from a Regression Discontinuity Approach.” American Economic Journal: Economic Policy 6 (4): 100–34. Brülhart, M., and F. Trionfetti. 2001. “Industry Specialisation, and Public Procurement: Theory and Empirical Evidence.” Journal of Economic Integration 16 (1): 106–27. Brülhart, M., and F. Trionfetti. 2004. “Public Expenditure, International Specialisation and Agglomeration.” European Economic Review 48 (4): 851–81. Buccirossi, P., L. Ciari, T. Duso, G. Spagnolo, and C. Vitale. 2013. “Competition Policy and Productivity Growth: An Empirical Assessment.” Review of Economics and Statistics 95 (4): 1324–36. Buehler, S., and S. Wey. 2013. “When Do State-Owned Firms Crowd Out Private Investment?” Journal of Industry, Competition and Trade 14: 319–30. Carboni, C., E. Iossa, and G. Mattera. 2017. “Barriers to Public Procurement: A Review and Recent Patterns in the EU.” IEFE Working Paper 92, Center for Research on Energy and Environmental Economics and Policy, Universita’ Bocconi, Milano, Italy. Cecchini, P. 1988. The European Challenges 1992: The Benefits of a Single Market. Aldershot, U.K.: Wildwood House Ltd. Chang, H. J. 2003. Globalisation, Economic Development and the Role of the State. London: ZED Books. Chen, G., M. Firth, and L. Xu. 2009. “Does the Type of Ownership Control Matter? Evidence from China’s Listed Companies.” Journal of Banking and Finance 33 (1): 171–81. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 39 Chen, X. 1995. “Directing Government Procurement as an Incentive of Production.” Journal of Economic Integration 10: 130–40. Cherif, R., and F. Hasanov. 2019. “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy.” IMF Working Paper No. 19/74, International Monetary Fund, Washington, DC. Chindooroy R., P. Muller, and G. Notaro. 2007. “Company Survival Following Rescue and Restructuring State Aid.” European Journal of Law and Economics 24 (2): 165–86. Clarke, J. L., and S. J. Evenett. 2003. ‘‘A Multilateral Framework for Competition Policy?’’ In The Singapore Issues and the World Trading System, edited by L. L. Clarke and S. J. Evenett. Bern, Switzerland: State Secretariat for Economic Affairs. Cohen, E. 2006. “Theoretical Foundations of Industrial Policy.” EIB Papers 11 (1): 84–106, Economics Department, European Investment Bank. Collie, D. R. 2000. “State Aid in the European Union: The Prohibition of Subsidies in an Integrated Market.” International Journal of Industrial Organization 18 (6): 867–84. Collie, D. R. 2002. “Prohibiting State Aid in an Integrated Market: Cournot and Bertrand Oligopolies with Differentiated Products.” Journal of Industry, Competition and Trade 2 (3): 215–31. Collie, D. R. 2005. “State Aid to Investment and R&D.” Economic Paper No. 231, Directorate-General for Economic and Financial Affairs, European Commission, Brussels. Commander, S., and J. Svejnar. 2011. “Business Environment, Exports, Ownership, and Firm Performance.” Review of Economics and Statistics 93 (1): 309–37. Conway, P., D. de Rosa, G. Nicoletti, and F. Steiner. 2006. “Regulation, Competition and Productivity Convergence.” OECD Economics Department Working Paper No. 509, Organisation for Economic Co- operation and Development, Paris. Coppens, P., K. Hilken, and C. Buts. 2015. “On the Longer-Term Effects of State Aid on Market Shares.” European State Aid Law Quarterly 14 :2. Cornett, M. M., L. Guo, S. Khaksari, and H. Tehranian. 2005. “The Impact of State Ownership on Performance Differences in Privately-Owned versus State-Owned Banks: An International Comparison.” Journal of Financial Intermediation 19 (1): 74–94. Cox, A., and P. Furlong. 1997. “Cross-border Trade and Contract Awards: The Intellectual Myopia at the Heart of the EU Procurement Rules.” European Journal of Purchasing and Supply Management 3 (1): 9–20. Crafts, N., and A. Hughes. 2014. “Industrial Policy for the Medium to Long-Term.” Working Paper No. 179, University of Warwick, Coventry, U.K. Criscuolo, C., R. Martin, H. Overman, and J. Van Reenen. 2012. “The Causal Effects of an Industrial Policy.” SERC Discussion Paper 0098, Spatial Economics Research Centre, London School of Economics. Davis, J., T. Richardson, R. Ossowski, and S. Barnett. 2000. “Fiscal and Macroeconomic Impact of Privatization.” IMF Occasional Paper 194, International Monetary Fund, Washington, DC. Deltas, G., and S. Evenett. 1997. “Quantitative Estimates of the Effects of Preference Policies.” In Law and Policy in Public Purchasing: The WTO Agreement on Government Procurement, edited by B. Hoekman and P. C. Mavroidis. Ann Arbor: University of Michigan Press. Dewenter, K., and P. Malatesta. 2001. “State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity.” American Economic Review 91 (1): 320–34. Domadenik, P., M. Koman, and J. Prasnikar. 2018. “Do Governmental Subsidies Increase Productivity of Firms? Evidence from a Panel of Slovene Firms.” Drustvena istrazivanja 27 (2): 199–220. 40 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Dovis, M., and J. Milgram-Baleix. 2009. “Trade, Tariffs and Total Factor Productivity: The Case of Spanish Firms.” World Economy 32 (4): 575–605. Dutz, Mark Andrew. 1991. “Firm Output Adjustment to Trade Liberalization: Theory with Application to the Moroccan Experience.” Working Paper No. WPS 602, Policy, Research, and External Affairs, World Bank, Washington, DC. Dutz, Mark, Rafael Barroso, Joao Bevilaqua Teixeira Basto, Xavier Cirera, Cornelius Fleischhaker, Antonio Nucifora, and Mariana Vijil. 2017. “Business Support Policies in Brazil: Large Spending, Little Impact.” Background paper, Um Ajuste Justo: Análise da eficiência e equidade do gasto público no Brasil, World Bank, Brasilia. Earle, J. S., and S. Shpak. 2019. “Impact of Privatization on Employment and Earnings.” IZA World of Labor, Bonn. Edmond, C., V. Midrigan, and D. Yi Xu. 2011. “Competition, Markups, and the Gains from International Trade.” Federal Reserve Bank of Minneapolis. Edwards, S. 1998. “Openness, Productivity and Growth: What Do We Really Know?” NBER Working Paper No. 5978, National Bureau of Economic Research, Cambridge, MA. Eslava, M., J. C. Haltiwanger, J. A. Kugler, and M. Kugler. 2004. “The Effects of Structural Reforms on Productivity and Profitability Enhancing Reallocation: Evidence from Colombia.” Journal of Development Economics (special issue) 75 (2): 333–71. Estache, A., and M. Fay. 2009. “Current Debates on Infrastructure Policy: Commission on Growth and Development.” Working Paper No. 49, World Bank, Washington, DC. Estache, A., and L. Trujillo. 2008. “Privatization in Latin America: The Good, the Ugly, and the Unfair.” In Privatization: Successes and Failures, edited by G. Roland. New York: Columbia University Press. European Commission. 2012. “Cross-Border Procurement above EU Thresholds.” DG Internal Market and Services, final report prepared by Ramboll Management Consulting. Evenett, S., and B. Hoekman. 1999. “Government Procurement: How Does Discrimination Matter?” Draft working paper, World Bank, Washington, DC. Falk, Martin. 2004. “What Drives Business R&D Intensity across OECD Countries?” WIFO Working Paper No. 236, Austrian Institute of Economic Research, Vienna. Ferrari, A., D. S. Mare, and I. Skamnelos. 2017. “State Ownership of Financial Institutions in Europe and Central Asia.” Policy Research Working Paper 8288, World Bank, Washington, DC. Foreman-Peck, J., and G. Federico. 1999. “Industrial Policies in Europe.” In European Industrial Policy. The Twentieth Century Experience, edited by J. Foreman-Peck and G. Federico. Oxford, U.K.: Oxford University Press. Garcia, J. A., and D. Neven. 2005. “State Aid and Distortion of Competition, a Benchmark Model.” HEI Working Paper No. 6, Graduate Institute of International and Development Studies, Geneva. Gawande, K., P. Krishna, and M. Olarreaga. 2012. “Lobbying Competition over Trade Policy.” International Economic Review 53 (1): 115–32. Geroski, P. 2005. The Effects of Competition. Cambridge, MA: MIT Press. Ginevičius, R., V. Podvezko, and S. Bruzge. 2008. “Evaluating the Effect of State Aid to Business by Multicriteria Methods.” Journal of Business Economics and Management 9 (3): 167–80. Goldberg, P., and G. Maggi. 1999. “Protection for Sale: An Empirical Investigation.” American Economic Review 89 (5): 1135–55. Goldeng, E., L. Grünfeld, and G. Benito. 2008. “The Performance Differential between Private and State Owned Enterprises: The Roles of Ownership, Management and Market Structure.” Journal of Management Studies 45 (7): 1244–73. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 41 González, X., J. Jamandreu, and C. Pazó. 2005. “Barriers to Innovation and Subsidy Effectiveness.” RAND Journal of Economics 36: 930–50. Goodwin, T., and M. D. Pierola. 2015. “Export Competitiveness: Why Domestic Market Competition Matters.” ViewPoint Public Policy for the Private Sector Series. Gual, J., and S. Jodar-Rosell. 2006. “Vertical Industrial Policy in the EU: An Empirical Analysis of the Effectiveness of State Aid.” La Caixa Economic Paper No. 01, 42. Guellec, D., and B. Van Pottelsberghe de la Potterie. 2003. “The Impact of Public R&D Expenditure on Business R&D.” Economics of Innovation and New Technology 12 (3): 225–43. Harbord, D., and G. Yarrow. 1999. “State Aid, Restructuring and Privatisation.” European Economy 3: 89–130. Harris, R., and C. Robinson. 2004. “Industrial Policy in Great Britain and Its Effect on Total Productivity in Manufacturing Plants 1990-1998.” Scottish Journal of Political Economy 51 (4): 528–43. Harrison, A. 1994. “Productivity, Imperfect Competition and Trade Reform: Theory and Evidence.” Journal of International Economics 36 (1–2): 53–73. Harrison, A., M. Meyer, P. Wang, L. Zhao, and M. Zhao. 2019. “Can a Tiger Change Its Stripes? Reform of Chinese State-Owned Enterprises in the Penumbra of the State.” NBER Working Paper No. 25475, National Bureau of Economic Research, Cambridge, MA. Harrison, A., and A. Rodriguez-Clare. 2010. “Trade, Foreign Investment, and Industrial Policy for Developing Countries.” Handbook of Development Economics 5: 4039–214. Head, K. 1994. “Infant Industry Protection in the Steel Rail Industry.” Journal of International Economics 37 (3–4): 141–65. Herrera, A. M., S. Lugauer, and G. Chen. 2018. “Policy and Misallocation.” Available at SSRN 3288691. Huang, X. 2019. “Reform of State-Owned Enterprises and Productivity Growth in China.” Asian-Pacific Economic Literature 33 (1): 64–77. Hufbauer, G. C., J. J. Schott, C. Cimino-Isaacs, M. Vieiro, and E. Wada. 2013. Local Content Requirements: A Global Problem. Vol. 102. Washington, DC: Peterson Institute for International Economics.  Hussinger, K. 2008. “R&D and Subsidies at the Firm Level: An Application of Parametric and Semiparametric Two-Step Selection Models.” Journal of Applied Econometrics 23 (6): 729–47. Hyytinen, Ari, and Otto Toivanen. 2005. “Do Financial Constraints Hold Back Innovation and Growth? Evidence on the Role of Public Policy.” Research Policy 34 (9): 1385–403. Igami, M. 2015. “Market Power in International Commodity Trade: The Case of Coffee.” Journal of Industrial Economics 63 (2): 225–48 (SSRN working paper version). IMF (International Monetary Fund). 2019. “Reassessing the Role of State-Owned Enterprises in Central, Eastern, and Southeastern Europe.” Departmental Paper No. 19/11, IMF, Washington, DC. IMF (International Monetary Fund). 2020. Fiscal Monitor. Washington, DC: IMF. Iootty, M., and S. Dauda. 2017. “Assessing Firm Markup in China: First Insights into the Manufacturing Industry.” Background paper, World Bank, Washington, DC. (See Development Research Center of the State Council. 2019. Innovative China: New Drivers of Growth). Iootty, M., G. Pop, and J. Pena. Forthcoming. “Corporate Market Power in Romania: An Assessment of Recent Trends through a Firm-Level Lens.” World Bank, Washington, DC. Irwin, D. 2000. “Did Late-Nineteenth-Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry.” Journal of Economic History 60 (2): 335–60. 42 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Itskhoki, O., and B. Moll. 2019. “Optimal Development Policies with Financial Frictions.” Econometrica 87 (1): 139–73. Kashiwagi, Y. 2019. “Postdisaster Subsidies for Small and Medium Firms: Insights for Effective Targeting.” ADB Economics Working Paper Series No. 597, Asia Development Bank, Mandaluyong, Philippines. Kee, H., and B. Hoekman. 2007. “Imports, Entry and Competition Law as Market Disciplines.” European Economic Review 51 (4): 831–58. Khandelwal, A. K., and P. B. Topalova. 2011. “Trade Liberalization and Firm Productivity: The Case of India.” Review of Economics and Statistics 93 (3): 995–1009. Khumalo, J., J. Mashiane, and S. Roberts. 2014. “Harm and Overcharge in the South African Precast Concrete Products Cartel.” Journal of Competition Law and Economics 10 (3): 621–46. Kikeri, S. 1998. “Privatisation and Labour: What Happens to Workers when Governments Divest.” Technical Paper No. 396, World Bank, Washington, DC. Kim, E. 2000. “Trade Liberalization and Productivity Growth in Korean Manufacturing Industries: Price Protection, Market Power, and Scale Efficiency.” Journal of Development Economics 62 (1): 55–83. Kitzmuller, M., and M. M. Licetti. 2013. “Competition Policy: Encouraging Thriving Markets for Development.” ViewPoint Public Policy for the Private Sector Series. Kornai, J., E. Maskin, and G. Roland. 2003. “Understanding the Soft Budget Constraint.” Journal of Economic Literature 41 (4): 1095–136. Kowalski, P., M. Büge, M. Sztajerowska, and M. Egeland. 2013. “State-Owned Enterprises: Trade Effects and Policy Implications.” OECD Trade Policy Paper No. 147, Organisation for Economic Co-operation and Development, Paris. Krishna, Pravin, and Devashish Mitra. 1998. “Trade Liberalization, Market Discipline and Productivity Growth: New Evidence from India.” Journal of Development Economics 56 (2): 447–62. Kutlina-Dimitrova, Z. 2018. “Government Procurement: Data, Trends, and Protectionist Tendencies.” European Commission Chief Economist’s Note. https://trade.ec.europa.eu/doclib/docs/2018/september/ tradoc_157319.pdf. Labory, S. 2006. “La politica industriale in un’economia aperta e basata sulla conoscenza.” L’industria 2/2006 (aprile-giugno): 255–82. Lach, S. 2002. “Do R&D Subsidies Stimulate or Displace Private R&D? Evidence from Israel.” Journal of Industrial Economics 50 (4): 369–90. Lall, S. 1994. “The East Asian Miracle: Does the Bell Toll for Industrial Strategy?” World Development 22 (4): 645–54. Lawrence, R., and D. Weinstein. 1999. “Trade and Growth: Import-Led or Export-Led? Evidence from Japan and Korea.” NBER Working Paper No. 7264, National Bureau of Economic Research, Cambridge, MA. Lee, J. W. 1995. “Government Interventions and Productivity Growth in Korean Manufacturing Industries.” NBER Working Paper No. 5060, National Bureau of Economic Research, Cambridge, MA. Levinsohn, J. 1993. “Testing the Imports-as-Market-Discipline Hypothesis.” Journal of International Economics 35: 1–22. Liu, E. 2019. “Industrial Policies in Production Networks,” Quarterly Journal of Economics 134 (4): 1883– 1948. London Economics. 2004. “Ex-post Evaluation of the Impact of Rescue and Restructuring Aid on the International Competitiveness of the Sector(s) Affected by Such Aid. Final Report to The European Commission–Enterprise Directorate-General.” INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 43 Lowinger, T. 1976. “Discrimination in Government Procurement of Foreign Goods in the U.S. and Western Europe.” Southern Economic Journal 42 (3): 451–60. Luzio, E., and S. Greenstein. 1995. “Measuring the Performance of a Protected Infant Industry: The Case of Brazilian Microcomputers.” Review of Economics and Statistics 77 (4): 622–33. Malinska, J., and S. Martin. 2000–2002. “Czech Supplier Development Programme in Electronics and Automotive.” http://www3.weforum.org/docs/Manufacturing_Our_Future_2016/Case_Study_13.pdf. Marion, J. 2007. “Are Bid Preferences Benign? The Effect of Small Business Subsidies in Highway Procurement Auctions.” Journal of Public Economics 91: 1591–624. Martin, P., T. Mayer, and F. Mayneris. 2011. “Public Support to Clusters: A Firm Level Study of French Local Productive Systems.” Regional Science and Urban Economics 41 (2): 108–23. Mattera, G., and F. Silva. 2018. “State Enterprises in the Steel Sector.” OECD Science, Technology and Industry Policy Paper 53, Organisation for Economic Co-operation and Development, Paris. Mattoo, A. 1997. “Economic Theory and the Procurement Agreement.” In Law and Policy in Public Purchasing: The WTO Agreement on Government Procurement, edited by B. Hoekman and P. C. Mavroidis. Ann Arbor: University of Michigan Press. McAfee, R. P., and J. McMillan. 1989. “Government Procurement and International Trade.” Journal of International Economics 26: 291–308. Melitz, M. 2005. “When and How Should Infant Industries Be Protected?” Journal of International Economics 66: 177–96. Mobarak, A. M., and D. Purbasari. 2005. “Political Trade Protection in Developing Countries: Firm Level Evidence from Indonesia.” https://ssrn.com/abstract=770949. Molnar, M., and J. Lu. 2019. “State-Owned Firms behind China’s Corporate Debt.” Working Paper CO/ WKP(2019)5, Organisation for Economic Co-operation and Development, Paris. Muendler, M. 2004. “Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986–1998.” CESifo Working Paper Series 1148, CESifo Group Munich. Murn, A., A. Burger, and M. Rojec. 2009. “Ucinkovitost drzavnih pomoci za resevanje in pre-strukturiranje podjetij v Sloveniji.” (The Effectiveness of State Aid for Rescuing and Restructuring in Slovenia. With English summary.) Nase Gospodarstvo/Our Economy 55 (1–2): 3–12. Nakabayashi, J. 2013. “Small Business Set-asides In Procurement Auctions: An Empirical Analysis.” Journal of Public Economics 100: 28–44. Ng, F., and A. J. Yeats. 1997. “Open Economies Work Better: Did Africa’s Protectionist Policies Cause Its Marginalization in World Trade?” Policy Research Working Paper 1636, World Bank, Washington, DC. Nicoletti, G., and S. Scarpetta. 2005. “Product Market Reforms and Employment in OECD Countries.” OECD Economics Department Working Paper No. 472, Organisation for Economic Co-operation and Development, Paris. Nishimizu, M., and J. Page. 1982. “Total Factor Productivity Growth, Technological Progress and Technical Efficiency Change: Dimensions of Productivity Change in Yugoslavia, 1965–1978.” Economic Journal (92): 920–36. Noland, M. 2000. Avoiding the Apocalypse: The Future of the Two Koreas. Washington, DC: Peterson Institute for International Economics, No. 94. Noland, M., and H. Pack. 2003. Industrial Policy in an Era of Globalization: Lessons from Asia. Washington, DC: Peterson Institute for International Economics, No. 358. Nunn, N., and D. Trefler. 2010. “The Structure of Tariffs and Long-Term Growth.” American Economic Journal: Macroeconomics 2 (4): 158–94. 44 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT OECD (Organisation for Economic Co-operation and Development). 2003. “Transparency in Government Procurement: The Benefits of Efficient Governance and Orientations for Achieving It.” TD/TC/WP(2002)31/ FINAL, Working Party of the Trade Committee, OECD, Washington, DC. OECD (Organisation for Economic Co-operation and Development). 2011. “Competitive Neutrality and State-Owned Enterprises, Challenges and Policy Options.” Corporate Governance Working Paper No. 1, OECD, Washington, DC. OECD (Organisation for Economic Co-operation and Development). 2017. The Size and Sectoral Distribution of State-Owned Enterprises. Paris: OECD Publishing. OECD (Organisation for Economic Co-operation and Development). 2019. “State-Owned Firms Behind China’s Corporate Debt.” Economic Department Working Paper No. 1536, ECO/WKP(2019)5, OECD, Paris, February 7. OFT (Office of Fair Trading). 2004. “The Effects of Public Subsidies on Competition.” Report prepared for OFT by Frontier Economics. Ohashi, H. 2005. “Learning by Doing, Export Subsidies, and Industry Growth: Japanese Steel in the 1950s and 1960s.” Journal of International Economics 66 (2): 297–32. Oxera. 2017. “Ex Post Assessment of the Impact of State Aid on Competition.” http://ec.europa.eu/ competition/publications/reports/kd0617275enn.pdf. Pack, H. 2010. “Industrial Policy in Historical Perspective.” Paper prepared for presentation at session on What Role for Industrial Policy? Perspectives from Around the World, American Economic Association Meetings, Denver. Pack, H., and K. Saggi. 2006. “The Case for Industrial Policy: A Critical Survey.” Policy Research Paper 3839, World Bank, Washington, DC. Parisi, M., and A. Sembenelli. 2003. “Is Private R&D Spending Sensitive to Its Price? Empirical Evidence on Panel Data for Italy.” Empirica 30 (4): 357–77. Pavcnik, Nina. 2002. “Trade Liberalization, Exit, And Productivity Improvements: Evidence from Chilean Plants.” Review of Economic Studies 69 (1): 245–76. Porter, M. E. 1990. The Competitive Advantage of Nations. New York: Free Press. Porter, M. E., and M. Sakakibara. 2004. “Competition in Japan.” Journal of Economic Perspective 18 (1): 27–50. Pursell, G. 2001. “Australia’s Experience with Local Content Programs in the Auto Industry: Lessons for India and Other Developing Countries.” Policy Research Working Paper 2625, World Bank, Washington, DC. Rask, K. 1994. “Evidence of the Empirical Relevance of the Infant Industry.” Agricultural Economics 10: 245–56. Restuccia, D., and R. Rogerson. 2008. “Policy Distortions and Aggregate Productivity with Heterogeneous Establishments.” Review of Economic Dynamics 11 (4): 707–20. Restuccia, D., and R. Rogerson. 2017. “The Causes and Costs of Misallocation.” NBER Working Paper No. 23422, National Bureau of Economic Research, Cambridge, MA. Rotemberg, J. 1993. “Comment.” In Incentives in Procurement Contracting, edited by Jim Leitzel and Jean Tirole. Boulder, CO: Westview Press. Rotemberg, M. 2019. “Equilibrium Effects of Firm Subsidies.” American Economic Review 109 (10): 3475–513 Sapienza, P. 2004. “The Effects of Government Ownership on Bank Lending.” Journal of Financial Economics 72 (2): 357–84. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 45 Schweiger, H. 2011. “The Impact of State Aid for Restructuring on the Allocation of Resources.” EBRD Working Paper 127, European Bank for Reconstruction and Development, London. Shapiro, D., and S. Globerman. 2012. “The International Activities and Impacts of State-Owned Enterprises.” In Sovereign Investment: Concerns and Policy Reactions, edited by K. Sauvant, L. Sachs, and W. Schmit Jongbloed. New York: Oxford University Press. Smith, D. A. C., and M. Trebilcock. 2001. “State-Owned Enterprises in Less Developed Countries: Privatization and Alternative Reform Strategies.” European Journal of Law and Economics 12 (3): 217–52. Soete, L. 2007. “From Industrial to Innovation Policy.” Journal of industry, Competition and Trade 7 (3–4): 273–84. Spector, D. 2009. “State Aids: Economic Analysis and Practice in the European Union.” In Competition Policy in the EU, edited by X. Vives. Oxford, U.K.: Oxford University Press. Ssennoga, F. 2006. “Examining Discriminatory Procurement Practices in Developing Countries.” Journal of Public Procurement 6 (3): 218–49. Stöllinger, R., and M. Holzner. 2017. “State Aid and Export Competitiveness in the EU.” Journal of Industry, Competition and Trade 17 (2): 203–36. Stone, S., D. Flaig, and J. Messent. 2015. “Emerging Policy Issues: Localisation Barriers to Trade.” OECD Trade Policy Paper No. 180, Organisation for Economic Co-operation and Development, Paris. Strohm, A. 2006. “Competition Policy at War with Industrial Policy?” EIB Papers 8 (2006), Economics Department, European Investment Bank. Sturgeon, T. J., L. L. Chagas, and J. Barnes. 2017. “Inovar Auto: Evaluating Brazil’s Automotive Industrial Policy to Meet the Challenges of Global Value Chains.” World Bank, Washington, DC. Symeonidis, G. 2008. “The Effect of Competition on Wages and Productivity: Evidence from the UK.” Review of Economics and Statistics 90 (1): 134–46. Takalo, T., and T. Tanayama. 2008. “Adverse Selection and Financing of Innovation: Is There a Need for R&D Subsidies?” Research Discussion Paper 19/2008, Bank of Finland. Tilton, M. 1996. “Restrained Trade: Cartels in Japan’s Basic Materials Industries.” Ithaca, NY: Cornell University Press. Treichel, V., M. Hoppe, O. Cadot, and J. Gourdon. 2012. “Import Bans in Nigeria Increase Poverty.” Africa Trade Policy Note 28, World Bank, Washington, DC. Tunali, C. B., and J. Fidrmuc. 2015. “State Aid Policy and the European Union.” Journal of Common Market Studies 53 (5): 1143–62. Tybout, J. R. 2000. “Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?” Journal of Economic Literature 38 (1): 11-44. Tybout, J. R., and M. D. Westbrook. 1995. “Trade Liberalization and the Dimensions of Efficiency Change in Mexican Manufacturing Industries.” Journal of International Economics 39 (1–2): 53–78. UNCTAD (United Nations Conference on Trade and Development). 2012. “Competition Policy and Public Procurement.” TD/B/C.I/CLP/14, Trade and Development Board, Trade and Development Commission, Intergovernmental Group of Experts on Competition Law and Policy. Uttley, M. R. H., and K. Hartley. 1994. “Public Procurement in the Single European Market: Policy and Prospects.” European Business Review 94 (2): 3–7. Uvalic, M. 2014. “Industrial Policy in Europe.” Policy Brief, Columbia SIPA Center on Global Economic Governance, December. 46 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Van Cayseele, P., J. Konings, and I. Sergant. 2014. “The Effects of State Aid on Total Factor Productivity Growth.” Working paper, Faculty of Economics and Business (FEB), Department of Economics, Leuven 548612, KU Leuven. Välilä, Timo. 2006. “No Policy Is an Island: On the Interaction between Industrial and Other Policies.” EIB Papers 11 (2): 8–33, Economics Department, European Investment Bank. Voigt, S. 2009. “The Effects of Competition Policy on Development: Cross-Country Evidence Using Four New Indicators.” Journal of Development Studies 45 (8): 1225–48. Wade, R. 1990. “Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization.” Princeton, NJ: Princeton University Press. Warwick, K. 2013. “Beyond Industrial Policy: Emerging Issues and New Trends.” OECD Science, Technology and Industry Policy Paper No. 2, Organisation for Economic Co-operation and Development, Paris. White, L. J. 2008. “Antitrust Policy and Industrial Policy: A View from the U.S.” Working Paper 08-04 presented at Second Lisbon Conference on Competition Law and Economics. http://www.reg-markets. org/. Wildau, Gabriel. 2016. “China’s State-Owned Zombie Economy.” Financial Times, February 29. https:// www.ft.com/content/253d7eb0-ca6c-11e5-84df-70594b99fc47. World Bank. 1993. The East Asian Miracle. Washington, DC: World Bank. World Bank. 2017. A Step Ahead: Competition Policy for Shared Prosperity and Inclusive Growth. Washington, DC: World Bank. World Bank. 2019. “Integrated State-Owned Enterprises Framework (iSOEF).” World Bank, Washington, DC. World Bank. 2020. World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, DC: World Bank. World Bank. Forthcoming. “Assessing the Direct and Indirect Impacts of State Aid in Romania: An Ex-Post Impact Evaluation.” World Bank, Washington, DC. Xiaojuan, J. 2002. “Promoting Competition and Maintaining Monopoly: Dual Functions of Chinese Industrial Policies during Economic Transition.” Washington University Global Law Review 1 (1): 49–66. Zhang, A., Y. Zhang, and R. Zhao. 2001. “Impact of Ownership and Competition on the Productivity of Chinese Enterprises.” Journal of Comparative Economics 29 (2): 327–46. INDUSTRIAL POLICY EFFECTS AND THE CASE FOR COMPETITION <<< 47