Long-Run Impact of Temporary Policy Interventions and Regional Industrial Development : The Role of Endowment Structure

Can temporary policy interventions have permanent effects on regional industrial development? This paper exploits disaggregated data on industrial construction under the centrally planned economic system in China before 1978 and compares the long-term development of industries with positive industrial investment during 1953-1978 to industries without any early investment within comparable industry-prefecture pairs. Our results provide support for the potential long-run impact of temporary policy intervention through intra-industry and inter-industry spillovers. However, it is vital to consider the local factor endowment structure to realize the long-run impacts since we find that deviation of the production technology from the factor endowment structure significantly lowers these impacts. This finding implies that the average long-term effect of temporary policy interventions estimated in the literature masks important heterogeneity based on the congruence between the factor intensity of targeted industries and local comparative advantages