The Causal Effects of an Industrial Policy

Business support policies designed to raise productivity and employment are commonworldwide, but rigorous micro-econometric evaluation of their causal effects is rare. Weexploit multiple changes in the area-specific eligibility criteria for a major program to supportmanufacturing jobs (“Regional Selective Assistance”). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes toconstruct instrumental variables for program participation. We match two decades of UKpanel data on the population of firms to all program participants. IV estimates find positiveprogram treatment effect on employment, investment and net entry but not on TFP. OLSunderestimates program effects because the policy targets underperforming plants andareas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g.over 150 employees). We also find the policy raises area level manufacturing employmentmainly through significantly reducing unemployment. The positive program effect is not dueto substitution between plants in the same area or between eligible and ineligible areasnearby. We estimate that “cost per job” of the program was only $6,300 suggesting that insome respects investment subsidies can be cost effective....