Firm Dynamics under Industrial Policy

Abstract

Designing an effective industrial policy is a critical issue for governments. How does the policy's effect on an industry as a whole vary with the attributes of the supported firms and with the nature of the supported industry? To answer this question, this thesis develops a model describing firm dynamics under government support in the form of tax credits and conducts simulation experiments while varying policy scenarios and parameters representing the industry's nature. The results show that the impact of government support on an industry varies greatly depending on a parameter representing one of the nature of the industry: inertia to the past market share. For industries where the inertia is within a certain degree, there is a particular trend in the impact of government support on an industry, a clear trade-off depending on the target of the support: the support to large firms has the effect of increasing the size of the largest firms but reduces competition and widens the gap between firms, while the support to small and medium-sized firms has the effect of increasing competition and narrowing the gap, but reduces the size of the largest firm in the industry. However, in industries where the inertia is greater than a certain level, the effect of such policies disappears. The inertia dominates the growth dynamics of the firms, and the policy becomes unable to change the state of the industry. These results highlight the importance of identifying the nature of the industries to be supported when designing industrial policies. They also show that even when targeting the industries that policies can affect, it is difficult to find a single policy scenario that simultaneously improves the state of an industry from all perspectives. Policymakers need to design industrial policies that meet their purposes with an understanding of the benefits and sacrifices that result from different targets of government support.