Move to innovation: place-based industrial relocation policy and firm innovation in China

Purpose- This study investigates whether and how place-based industrial relocation policy affects firm innovation.Design/methodology/approach- By exploiting the establishment of China's National Industrial Relocation Demonstration Zones (NIRDZs) as a quasi-natural experiment in a difference-in-differences design, the authors examine the externalities of industrial policies that support sustainable development and growth from the perspectives of firms' patenting activities.Findings - The study consistently finds that the NIRDZs policy significantly boosts local firm innovation, translating into a 60.46% increase in the patent applications of treated firms. The estimation results remain robust to a series of alternative specifications. Moreover, heterogeneity analysis suggests that the firms that benefited most were state-owned enterprises, firms with higher productivity, or firms in non-high-tech industries. Further, the authors find that the NIRDZs policy stimulates firm innovation mainly in the form of utility model patents, followed by designs and invention patents.Research limitations/implications - The results provide suggestions and implications for policymakers to improve the efficiency of state-led industrial policies and avoid "government failure" in policy implementation.Social implications - This study provides suggestions and implications for policymakers to improve the efficiency of state-led industrial policies and avoid "government failure" in the policy implementation.Originality/value - This study fills the research gap by exploiting quasi-experiments to assess the effectiveness of state-led industrial policies for emerging economies. (2) The analysis sheds empirical light on how corporate innovation is motivated and financed by selective and functional industrial policies. (3) Theoretically, the results rationalize why state-led industrial relocation fuel innovation capabilities of localities from Marshall externalities and competition crowding-out effects.