Decoding China's Industrial Policies

We decode China’s industrial policies from 2000 to 2022 by employing large language models (LLMs) to extract and analyze rich information from a comprehensive dataset of 3 million documents issued by central, provincial, and municipal governments. Through careful prompt engineering, multistage extraction and refinement, and rigorous verification, LLMs allow us to extract structured information on detailed policy dimensions, including context and scope, targeted industries, tools, implementation mechanisms, and intergovernmental relationships, etc. Combining these newly constructed industrial policy data with microlevel firm data, we document thirteen key facts about China’s industrial policy that explore the following critical questions. Which industries are targeted and how does this align with local comparative advantage? What policy tools are deployed, and how does their use vary across different levels and regions of governments, as well as over the various phases of development of an industry? We also examine the impact of these policies on firm behavior, including entry, production, and productivity growth, and highlight the heterogeneous effects of different policy tools. In addition, we explore the political economy of industrial policy, focusing on top-down transmission mechanisms, policy diffusion, and persistence across regions. Finally, we document spatial inefficiencies and industry-wide overcapacity as potential downsides of industrial policies.