Picking Winners? Government Subsidies and Firm Productivity in China

China has been both praised and criticized for using industrial policy to achieve its economic goals. Does industrial policy work for China? Particularly, are these industrial policies making the targeted Chinese firms more productive? Alternatively, are efforts to promote productivity undercut by other efforts such as to maintain or expand employment in less productive enterprises? In this paper, we attempt to shed light on these questions through the analysis of previously underutilized microdata on direct government subsidies provided to China’s publicly traded firms. We use Google BERT plus manual validation to categorize subsidies into different types. We then estimate total-factor productivity (TFP) for Chinese listed firms and investigate the relationship between these estimates of TFP and the allocation of government subsidies at the aggregated level and across different types. We find little evidence that the Chinese government consistently “picks winners”. At the aggregated level, Firms’ ex-ante productivity is negatively correlated with subsidies received by firms, and subsidies appear to have a negative impact on firms’ ex-post productivity growth throughout our data window, 2007 to 2018. At the more refined subsidy type level, neither subsidies given out under the name of R&D and innovation promotion nor industrial and equipment upgrading positively affect firms’ productivity growth. On the other hand, we find a positive impact of subsidy on current year employment, both for the aggregated and employment-related subsidies. These findings suggest that China’s increasingly prescriptive industrial policies may have generated limited effects in promoting productivity