The Synergistic Effects of Encouraging Industrial Policies and Tax Incentives

【Authors】

WANG Yiming, ZENG Zhuoer

【WorkUnit】

Xiamen University, 361005.

【Abstract】

As an important tool for government economic regulation, encouraging industrial policies plays a crucial role in upgrading the industrial structure and promoting sustainable economic development. However, existing research often only discusses the “blanket” effect of industrial policies, failing to separately discuss the effects of tax incentives and non-tax industrial policies. Verifying their effectiveness and determining the main influencing factors remains one of the pressing challenges in the current study.
This study exploits a natural experiment embedded in the Catalogue of Encouraged Industries for the Large-scale Development of Western China. Under this policy, firms in listed industries are entitled to income tax relief only if income from their principal business accounts for at least 70% of total revenue. By using a DDD and a fuzzy RD method, we draw the following three conclusions. First, compared to their counterparts in non-encouraged industries, enterprises newly entering encouraged industries have significantly improved total factor productivity. Second, among all encouraged industries, enterprises eligible for income tax relief exhibit significantly stronger productivity gains than those also in the encouraged industries but falling short of the threshold. This contrast highlights the limited efficacy of non-tax instruments when deployed in isolation and underscores the important role of tax incentives in specific industrial policies. Third, mechanism analysis shows that tax incentives can “complement” and “enhance” the effects of non-tax industrial policies. On the one hand, tax incentives can provide enterprises with more autonomous internal funds, thereby compensating for the limitations of non-tax industrial policies, which can only alleviate enterprises’ financing difficulties from the external environment; on the other hand, tax incentives strengthen endogenous incentives for upgrading from labor-intensive to capital-intensive production, thereby better aligning with regional development goals and enhancing the overall effect of industrial policies.
This paper emphasizes the important role of supporting tax incentives in specific regional industrial policies, and also confirms tax tools as key factors driving enterprises to substantially improve efficiency. It provides certain insights for the coordination of various tools in future regional industrial policy portfolios and also has reference value in promoting the development of characteristic industries and cultivating regional advantageous industries.

JEL: H20, L52, L70

【KeyWords】

Encouraging Industrial Policies, Tax Incentives, Total Factor Productivity, Large-scale Development of Western China