As important means of economic regulation and control, industrial policies have the vital strategic significance for the development of China’s economy. Above all, how to effectively guide the flow of economic resources to the policy-supported industries is essential to the effectiveness of industrial policies. Although previous studies have found that under the guidance of industrial policies the allocation of capital tilts to policy-supported industries, the extant literature only focuses on the resource allocation differences between the two groups of industries, namely supported industries vs. non-supported industries. In other words, prior studies do not deeply examine how these additional economic resources allocate among different policy-supported industries as well as among different firms within certain policy-supported industry. More importantly, the existing studies examine the allocation of a certain economic resource seperately（such as stock market, credit market or government subsidies）without any comprehensive discussion on the linkage between different types of resources allocation. This paper discusses in depth the allocation of resources among different policy-supported industries as well as among different firms within certain policy-supported industry. At the same time, this paper incorporates both credit resources, which are relatively more market-oriented, and government subsidies into the analytical scope. We empirically test the capital allocation guided by industrial policies, and the different effects that market force and government support bring out. Thus we can provide a more comprehensive perspective for the allocation of resources under the industrial policies. Industrial policies guide market resources to the policy-supported industry group. Among these policy-supported industries, we expect that the growth sectors are more likely to be favored by the market because of their growth rates relatively faster than the mature ones. Further, within these policy-supported growth industries, due to economies of scale, there is a positive relationship between the development speed of a firm and its size（Hart, 1962）. Therefore, in the policy-supported growth industries, the larger firms receive more market-oriented capital allocation. Based on the above analysis, we can see that, relying solely on market force, even backed by industrial policies, those in mature industries and those smaller firms in growing industries are still less able to obtain market capitalization. Thus, in order to achieve the ultimate goal of the industrial policies, the governments can use subsidies and other means to allocate a part of the capital to the firms encouraged by industrial policies but not favored by the market, so as to make up for the deficiencies in market allocation of resources. Using a sample from China A-share listed non-financial firms from 2001 to 2014, we find that because of the guiding force of industry policies, firms in policy-supported industries get more debt financing, and especially the larger firms in growth industries benefit more. Meanwhile, industries supported by industrial policies also receive more government subsidies. Precisely, smaller firms in growth industries and larger firms in mature industries get more government subsidies. These results show that even capital allocation is guide by industrial policies, market force favor firms with higher growth opportunity; government subsidies support firms with lower growth opportunity, which are overlooked by the market force. In general, government subsidies play a supplementary role in the market-oriented capital allocation under industrial policies. This paper digs deeper into the resource allocation under the guidance of industrial policies among the policy-supported industries as well as within certain policy-supported industry and comprehensively examines the different roles played by market force and government support. This paper provides a more complete theoretical analysis framework of the operational logic of the two alternative resource allocation mechanisms and empirical evidence. Overall, two forces of resources allocation are shown to be somewhat complementary, but not completely. Whether this incomplete complementarity is for a better support of the industries or is due to some inefficiency is worth further study. The Third Plenary Session of the 18th CPC Central Committee of China made it clear that the market should play a decisive role in the allocation of resources and a government plays a better role. Taking the allocation of resources in industrial policies as an object, this paper provides a good annotation of this major theoretical point of view and at the same time reference for how to coordinate the two mechanisms of the market mechanism and government support.
Capital Allocation under Industrial Policies: Market Force and Government Support
Journal of Finance and Economics Vol. 44, Issue 04, pp. 4 - 19 (2018) DOI:10.16538/j.cnki.jfe.2018.04.001
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Cite this article
Jin Yuchao, Shi Wen, Tang Song, et al. Capital Allocation under Industrial Policies: Market Force and Government Support[J]. Journal of Finance and Economics, 2018, 44(4): 4-19.
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