R&D, Industrial Policy and Growth

An issue with estimating the impact of industrial support is that the firms that receive support may be politically connected, introducing omitted variable bias. Applying fixed-effects regressions on Vietnamese panel data containing several proxies for political connectedness to correct this bias, we find that firms that receive industrial support in the form of tax holidays experience more rapid productivity growth, particularly in R&D-intensive industries, and less so among politically connected firms. These findings do not appear to be due to the presence of financing constraints. We then develop a second-generation Schumpeterian growth model with many industries, and show that tax holidays disproportionately raise productivity growth in R&D-intensive industries. These results are significant and important for governments, especially those in transition and developing countries, in better targeting their industrial policy to facilitate higher productivity growth.