## Industrial Policies and Firm Performance: A Nuanced Relationship

_IMF Working Papers, July 18, 2025_

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## Bibliographic details
- Authors: Rafael Machado Parente, Sandra Baquie, Yueling Huang, Florence Jaumotte, Jaden Kim, Samuel Pienknagura
- Published: July 18, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229016629.001

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### Core empirical findings
- Industrial policies (IPs) show heterogeneous effects on firm performance that vary by instrument, firm and industry characteristics, value chain position, and time horizon.
- IPs that reduce 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 matter: IPs are linked to stronger improvements in VA, capital and payroll in the short term when distortions are high.
- Cross-sectoral spillovers:
  - Protective IPs targeting upstream sectors are associated with improved outcomes in downstream firms.
  - Protective IPs 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.

### Policy-relevant implications and interpretation
- The effectiveness of IPs cannot be assumed uniform: instrument design, recipient firm characteristics (age, financial constraint), industry-level distortions, and value chain position critically shape outcomes.
- Trade liberalization-type policies (reducing trade barriers) tend to produce medium term firm-level gains and positive cross-sectoral spillovers.
- Discriminatory subsidies may yield short term gains in VA, productivity and payroll but risk adverse medium term outcomes, especially when targeted against foreign interests.
- Export incentive programs may need to account for transitional costs or adjustment periods that can cause short term declines before medium term benefits materialize.
- Targeting considerations:
  - Younger and financially constrained firms appear to benefit more strongly (in the observed relationships) from several IP instruments.
  - High industry distortion environments amplify short term gains in VA, capital and payroll from IPs, suggesting distortion-aware policy calibration.

### Subject and keywords
- 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

*IMF Working Papers — "Industrial Policies and Firm Performance: A Nuanced Relationship", July 18, 2025; Working Paper No. 2025/143, DOI: https://doi.org/10.5089/9798229016629.001*

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_Source: https://www.imf.org/en/publications/wp/issues/2025/07/18/industrial-policies-and-firm-performance-a-nuanced-relationship-568626_