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Economic growth, industrial dynamics and industrial policy: The role of investment and production subsidies

Year: 2025

Type: article

Abstract: Estimating the effectiveness of industrial policy remains a complex task, particularly in quantifying spillover effects and identifying the most impactful policy instruments. This study employs a dynamic computable general equilibrium (CGE) model encompassing 157 industries in the Chinese economy to assess the effects of two key industrial policy tools—production subsidies and investment subsidies—on macroeconomic performance, industrial output, and investment from 2025 to 2035. Results show that both subsidy types generate mild but positive macroeconomic effects, with investment subsidies exhibiting slightly stronger, more enduring, and broader impacts. Furthermore, the abrupt removal of production subsidies causes significant economic disruption, and their benefits fade quickly after withdrawal. In contrast, the withdrawal of investment subsidies leads to a smoother adjustment, with positive effects fading gradually. Given that both production and investment subsidies generate trade-offs across sectors, policymakers should conduct comprehensive impact assessments, align subsidy design with broader trade strategies, and adopt gradual transitions to avoid economic disruptions.

Source: Economic Analysis and Policy

DOI: 10.1016/j.eap.2025.11.007

Authors: Can Wang, Xiujian Peng, Janine Dixon, Cuiping Zhao

Institutions: Henan Agricultural University, Victoria University

Language: English

Topic: Fiscal Policy and Economic Growth

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Decent work and economic growth, Industry, innovation and infrastructure

Open Access status: hybrid

Estimated APC paid: $2,890