Strategic emerging industries and innovation: Evidence from China

Abstract

This paper relies on the policy of strategic emerging industries in China as a quasi-natural experiment to examine the role that the industry policy plays in shaping firm innovation. Utilizing a listed firm-level panel dataset over 2006–2020 in difference-in-differences framework, we find that innovation increases after this policy implemented, and this increase is larger in firms belonging to the strategic emerging industries. Our empirical results hold across various econometric specifications employed and support the argument that the industry policy strengthens the incentives of firms to innovate. Moreover, we find evidence that the strategic emerging industries policy significantly promotes tax benefits, firm loans, industrial concentration, R&D input and innovator quality, leading to more innovative outcomes. This paper also suggests that developing countries closed to the frontier of world’s advanced technologies can adopt the industry policy to optimize the innovative outcomes structure.