A number of studies have revealed that the effect of industrial policy on productivity
growth is negative. Is this because industrial policy fails to control the activities of
firms, or because it can effectively control them? This paper attempts to answer these
questions, using firm-level data from the cotton spinning industry in Japan for the
period 1956-64. It has been determined that industrial policy cut two ways during this
period. Industrial policy effectively controlled the output of cotton spinning firms,
which contributed to the establishment of a stable market structure during the period.
On the flip side, such policy constrained the reallocation of resources from less
productive large firms to more productive small firms. Combined with the negative
productivity growth of large firms during this period, industrial policy resulted in
negative industry productivity growth.
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