State-Led Industrialization Projects and Firm Dynamics : The Case of Third-Front Construction in China

Government intervention and firm dynamics are crucial for long-run growth. In this paper, we study the persistent effects of one of the largest state-led industrialization projects in human history---namely the Third-Front (TF) construction project---on firm dynamics: entry, exit, and innovation. Using a unique data set that covers the registration information of the universe of firms in China, and an instrumental variable strategy, we document that TF has persistent and positive effects on entry, exit, and innovation. The effects are more pronounced for smaller and non-state-owned firms, and are still present for service industries. The mechanisms are that TF raises human capital, entrepreneur spirits, and improves infrastructures. We build and estimate a firm-dynamics model to quantify the effects of TF