Industrial Policy, Product Switching, and Export Performance

Abstract

Industrial policy can promote economic growth and industrial upgrading by encouraging enterprises to adopt product switching. By utilizing comprehensive industrial policies and customs trade databases from 2000 to 2015, this paper found that firms with product ranges within policy-supported areas were more active in product switching. Among all the enterprises that adopted the product switching, those with nonmain products in policy-supported areas were more inclined to adjust their main product. They tended to transform nonmain product to main product as opposed to introducing new main product in order to effectively leverage their export experience and established technology. Whereas, for enterprises whose main product was within the policy-supported areas, their tendency to switch products significantly decreased. Mechanism analysis suggested that policy support, by alleviating industry distress and mitigating excessive market competition, encouraged firms to switch products to areas with policy backing. Moreover, we estimated trade performance after product switching from the perspective of product unit price and export product quality. We found that for firms whose main product was in policy-supported areas, such switching was more likely to result in “low price, high quality” exports, whereas for firms with nonmain products in supported areas, such switching was more likely to lead to “high price, low quality” exports, which indicates that firms switching to policy-supported areas need to continuously develop their core competencies and operate effectively to improve their production performance.