IMF Working Papers

Industrial Policies and Firm Performance: A Nuanced Relationship

By Rafael Machado Parente, Sandra Baquie, Yueling Huang, Florence Jaumotte, Jaden Kim, Samuel Pienknagura

July 18, 2025

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Rafael Machado Parente, Sandra Baquie, Yueling Huang, Florence Jaumotte, Jaden Kim, and Samuel Pienknagura. "Industrial Policies and Firm Performance: A Nuanced Relationship", IMF Working Papers 2025, 143 (2025), accessed November 8, 2025, https://doi.org/10.5089/9798229016629.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper empirically studies the relationship between industrial policies (IPs) and firm performance, showing it varies by instrument, firm and industry characteristics, value chain position, and time horizon. Consistent with the trade literature, IPs reducing trade barriers are linked to medium term improvements in firm performance. Subsidies discriminating against foreign interests are linked to short term improvements in value added (VA), productivity and payroll, which fade or turn negative in the medium term. Export incentives are linked to short term declines in firm performance followed by medium term gains. These relationships are stronger for young and financially constrained firms compared to older and less financially constrained firms. Industry distortions also matter—IPs are linked to stronger improvements in VA, capital and payroll in the short term when distortions are high. Finally, we find cross-sectoral spillovers: protective IPs targeting upstream sectors are associated with improved outcomes in downstream firms, while those targeting downstream sectors correlate with weaker upstream performance. Cross-sectoral spillovers from trade liberalizing policies are consistently positive and larger in magnitude, regardless of value chain position.

Subject: Export subsidies, International trade, Production, Productivity, Total factor productivity, Trade barriers

Keywords: Constrained firm, Export Incentives, Export subsidies, Firm Performance, Global, Industrial Policies, Industry distortion, Liberalizing trade barriers, Productivity, Protectionist export incentive, Subsidies, Total factor productivity, Trade barriers

Publication Details

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