Industrial Policy, Product Switching, and Export Performance

• Published date: 01 January 2024
• Author: Jiemiao Dong,Zhuangxiong Yu,Xunpeng Shi,Yang Yang
• Date: 01 January 2024
• DOI: http://doi.org/10.1111/cwe.12519

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 167–196, Vol. 32, No. 1, 2024

167

Industrial Policy, Product Switching, and Export

Performance

Jiemiao Dong, Zhuangxiong Yu, Xunpeng Shi, Yang Yang*

Abstract

Industrial policy can promote economic growth and industrial upgrading by encouraging

enterprises to adopt product switching. By utilizing comprehensive industrial policies and

customs trade databases from 2000 to 2015, this paper found that firms with product ranges

within policy-supported areas were more active in product switching. Among all the enterprises

that adopted the product switching, those with nonmain products in policy-supported areas

were more inclined to adjust their main product. They tended to transform nonmain product

to main product as opposed to introducing new main product in order to effectively leverage

their export experience and established technology. Whereas, for enterprises whose main

product was within the policy-supported areas, their tendency to switch products significantly

decreased. Mechanism analysis suggested that policy support, by alleviating industry distress

and mitigating excessive market competition, encouraged firms to switch products to areas

with policy backing. Moreover, we estimated trade performance after product switching from

the perspective of product unit price and export product quality. We found that for firms whose

main product was in policy-supported areas, such switching was more likely to result in “low

price, high quality” exports, whereas for firms with nonmain products in supported areas,

such switching was more likely to lead to “high price, low quality” exports, which indicates

that firms switching to policy-supported areas need to continuously develop their core

competencies and operate effectively to improve their production performance.

Keywords: export performance, high-quality development, industrial policy, product

switching

JEL codes: D21, F16, L52

I. Introduction

Industrial policy, existing in various forms, has been widely used by governments

of developed and developing countries across different historical periods. Industrial

*Jiemiao Dong, Lecturer, School of Economics and Trade, Guangdong University of Foreign Studies,

China. Email: dongjiemiao@126.com; Zhuangxiong Yu, Professor, Institute of Industrial Economics, Jinan

University, China. Email: iie_yuzx@jnu.edu.cn; Xunpeng Shi, Professor, Australia-China Relations Institute,

University of Technology Sydney, Austrialia. Email: xunpeng.shi@uts.edu.au; Yang Yang (corresponding

author), Associate Professor, International School of Business & Finance, Sun Yat-sen University, China.

Email: yangy85@mail.sysu.edu.cn. The authors are grateful for support from the Key Project of the National

Social Science Foundation of China (No. 22AJY018).

Jiemiao Dong et al. / 167–196, Vol. 32, No. 1, 2024

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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policy achieves certain public objectives by guiding changes in economic structure,

with these objectives typically being to stimulate innovation, productivity, and

economic growth. Recently, a growing body of research has recognized the positive

impact of industrial policy support (Blalock and Gertler, 2008; Juhász et al., 2023).

In the journey towards becoming high-income economies, many countries have

adopted industrial policies to alleviate market failures. For example, Japan, in its early

development stages, established the Technopolis program to reduce development costs,

successfully spurring investment and job growth in the supported sectors (LaPoint and

Sakabe, 2021). South Korea’s implementation of the Heavy and Chemical Industries

Promotion Policy has stimulated both short-term and long-term growth in its

supported industries (Lane, 2020). In the United States, policies like carbon taxes and

research subsidies have been utilized to encourage innovation in clean technologies

and promote green development (Acemoglu, 2016). Following the 2008 economic

crisis, the U.S. government provided substantial financial support through the Auto

Industry Assistance Act, which stimulated the recovery and innovation within the

automotive sector. Aghion et al. (2015) argue that the core issue is not whether

industrial policies should exist, but rather how to optimize their implementation in

the current environment where such policies are prevalent. The present paper focuses

on the impact of industrial policy on the product switching of China’s foreign trade

enterprises, examining how industrial policy influences the behavior of export

businesses and plays a guiding role in the upgrading of manufacturing products and

structural transformation.

Industrial policy manifests in various forms, yet in China, the key industrial policies

embedded within the Five-Year Plans are particularly emblematic (Cai and Tian, 2019;

Yu et al., 2020). A local government’s Five-Year Plan sets the regional development

goals and corresponding policy directions for a certain period (Huang et al., 2023).

The policy signals released by the Five-Year Plan can shape market expectations and

enhance market confidence, which may help businesses reduce some obstacles in

product upgrading and structural transformation. For example, if market confidence

is strong and expectations are positive, exporters experiencing product switching

might face fewer financing constraints. Moreover, the government policy support can

encourage enterprises to delve into emerging sectors, and provides a form of market

confidence, motivating the enterprises to persevere to reap the benefits of economies of

scale despite the likely initial losses. Therefore, to better examine the effectiveness of

China’s industrial policy, specifically its impact on enterprise export performance, we

have chosen to focus our analysis on the key industrial policies embedded within the

Five-Year Plan.