Timely Policy Exit: Reducing Over-Investment and Driving High-QualityFirm Performance

Dai Hongwei, Zheng Lichen*

School of Economics, Central University of Finance and Economics (CUFE), Beijing, China

Abstract: Using data from the 11th to 14th Five-Year Plan periods (2006-2025), this studyapplies a Difference-in-Differences (DID) approach to assess the impact of industrial policywithdrawal. Industries that have faced policy withdrawal for over a decade are categorizedas the treatment group, while consistently supported industries form the control group.The analysis examines how withdrawal affects firm total factor productivity (TFP) andinvestment behavior. The results show that policy withdrawal boosts firm TFP by reducingover-investment and improving the efficiency of R&D spending. This effect is particularlyevident in industries with strong, competitive leading firms. Additionally, in regions withlower levels of marketization, timely policy withdrawal plays a key role in curbing overinvestment.This study also highlights a dual effect of policy withdrawal: while it fosterscorporate social responsibility, it may also encourage financial speculation. These findingssuggest that the implementation of industrial policy should provide “timely assistance”over a limited timeframe rather than long-term support to well-established industries. Asindustries mature, policy support should be gradually reduced or phased out to avoid overinvestmentand enhance firm efficiency.

Keywords: Industrial policy withdrawal; total factor productivity (TFP); over-investment;

JEL Classification Codes: O38, O25, L52

DOI: 10.19602/j.chinaeconomist.2025.01.03