How Do U.S. Firms Withstand Foreign Industrial Policies ?

Département: Finance

Intervenant: Vyacheslav "Slava" Fos (Boston College)

Salle: TBD

Abstract

This paper is the first to examine how China’s Five-Year Plans (“Plans”) affect the production allocation of U.S. firms. The Plans represent the highest level of China’s industrial policy, identifying key sectors for state support. Using the U.S. Census Longitudinal Business Database and Plans issued in 2001, 2006, 2011, and 2016, we find significant production displacement among U.S. industries operating in the same sectors targeted by the Plans in China. Over the five years following a sector’s inclusion in a Plan, the corresponding U.S. industries experience a 3.6% reduction in output, a 5.1% drop in employment, a 6.1% decrease in investment, and a 1.0% uptick in factory closure rates. These effects were neither anticipated by the stock market nor reflected in forwardlooking firm decisions such as investment and job postings at the time. Some U.S. firms, however, successfully adapt by reallocating production toward “beneficiary” industries— those upstream or downstream of the targeted sectors—or by offshoring to the favored sectors within China. Such adjustments are enabled by preexisting productivity, sectoral and geographic footprints, financial access, and labor market flexibility. This study contributes to the ongoing policy debate on how best to support domestic firms and the broader economy in the face of global shocks, particularly those driven by foreign government intervention.