Political Turnover, Expectations of Policy Stability and the Effectiveness of Industrial Policy

This paper constructs a model illustrating how irregular political turnover impedes entrepreneurs’ response to industrial policies by affecting their expectations on policy stability, thus inhibiting the effectiveness of industrial policies. Empirical analyses based on Chinese Industrial Enterprise Database shows that: (1) industrial policy measured by subsidies significantly improves the TFP of subsidized enterprises, but the effect declines with increasing irregularity of political turnover, (2) the effect is not driven by officials’ tenures or local economic conditions, (3) the effect is more pronounced for domestic, private and small enterprises, industries with higher level of investment irreversibility, and in regions with a lower proportion of central-supported industries and lower administrative level, and (4) irregular political turnover influences the incentive effect of industrial policy on enterprises’ expansion decisions and investment efficiency.