The Persistent Effects and Welfare Analysis of Place-Based and Industrial Policy: A Spatial Economy Perspective

This paper provides causal evidence on the long-term effects of early-stage place-based and industrial policies, specifically examining the preferential tax rate for state-owned enterprises (SOEs) in China. Using a spatial quantitative model, I analyze the regional and sectoral development impact of the preferential tax policy and conduct a counterfactual analysis to investigate national welfare implications. The findings reveal large and persistent effects of the examined policy, showing that the preferential tax rate in the early stages substantially promotes the growth trajectory of local private firms, affecting both intensive and extensive margins. The policy significantly stimulates the growth of local industrial output, employment, productivity, and firm size in the targeted regions and industries. While generating substantial welfare gains at the local level, the SOE-preferential policy reveals a trade-off, incurring losses at the national level. A counterfactual exercise of unifying the investment across the country finds that the unified tax rate brings a 16% to 36% increase in the national output and a 9% to 17% increase in the welfare.