Which to be more diversified: industrial-policy supported or non-supported enterprises?


YANG Xingquan;YIN Xingqiang;MENG Qingxi


School of Economics and Management, Shihezi University;Research Center for Corporate Governance and Management Innovation, Shihezi University;School of Accounting, Shanghai University of Finance and Economics;School of Accounting, Shanghai University of Finance and Economics


China’s industrial policy (IP) plays an important role in allocating resources, supporting industry development, and alleviating backwardness. Especially in contemporary China where industrial structure upgrading and elimination of excess capacity were urgently needed, IP had an important impact on micro-enterprise investment decisions, profit growth, and the transformation and development of macro industries (Aghion et al., 2015). In this study, we addressed the following question. Does IP affect firm diversification? IP has a strong function of resource allocation and management. Compared with non-supported industries, supported industries often receive government subsidies and tax relief. Because diversification requires a large amount of resources, enterprises supported by IP have more resources to conduct diversified operation. We define this mechanism as the support effect. However, IP also limits the development of non-supported industries and gradually eliminates or transforms them (Jiang and Li, 2010). In response, non-supported enterprises may enter the supported industries through diversified operation, which is called the anti-driving effect. These two mechanisms in the relationship between IP and corporate diversification thus work in opposing directions. Based on data from Chinese A-share listed companies from 2002 to 2017 and using multiple measurement methods such as a difference-in-difference model, this paper explored the relationship between IP and corporate diversification and its economic consequences. The results showed that (1) compared with enterprises supported by IP, non-supported enterprises had a higher degree of diversification and were more involved in industries supported by IP; (2) IP reduced government subsidies and tax incentives for non-supported enterprises that involved themselves in supported industries by diversifying, which could help them to avoid such restrictions; and (3) diversified behaviors of non-supported enterprises involved in supported industries not only improved the value but also increased the productivity of those industries. The policy implications are as follows. When faced with the restriction of IP, non-supported industries (enterprises) can step into the supported industries through diversification to realize their own transformation or growth. Therefore, micro-enterprises should pay close attention to macro-economic policies and take timely and appropriate countermeasures. However, IP has a strong function of resource redistribution. Thus, in the process of IP formulation and implementation, government should consider not only the impact on supported industries (enterprises), but also the behavior selection and development trend of non-supported industries (enterprises).The paper makes several contributions. First, it provides a new micro mechanism for IP’s promotion of industrial structure transformation, as IP forces enterprises from other industries to diversify when it supports certain industries. Second, as an important means for the government to regulate industrial development and guide enterprises to enter or exit particular industry sectors, IP is an essential incentive to drive Chinese enterprises to adopt diversification, which enriches the determinants of enterprise diversification in emerging markets from the institutional level. This paper also provides some empirical evidence for a diversification premium based on China’s IP perspective. Third, literature on micro-enterprises’ response to the external environment through alternative mechanisms mainly discusses political or bank connections. Few studies have focused on the strategy selection of enterprises themselves. From the perspective of diversification, this paper examines the coping strategies of enterprises not supported by IP and expands existing research. Fourth, this paper clarifies the institutional roots and reverse effect of corporate behavior choices on the implementation of macroeconomic policies when firms face regulations due to those policies while accounting for the interaction between the point analysis of micro-enterprise behavior and the feedback mechanism of macroeconomic policy.


industrial policy;diversification;support effect;anti-driving effect


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