We look into how industrial policy affects corporate investment and investment efficiency. We investigate whether industrial policies have distinct effects on China's state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs) by utilizing the micro-level data of A-share listed companies on the Chinese stock market from 2001 to 2020. To further illustrate the impact of industrial policy on investment efficiency, we also identify specific policy adherents. The empirical findings demonstrate that, whereas SOE investment and efficiency are unaffected, industrial policies encourage investments among non-SOEs at the expense of reducing their investment efficiency. The primary means by which industrial policy has a negative impact on investment efficiency are subsidies from the government and competition between industries. In addition, both SOE and non-SOE policy adherents lose investment efficiency as a result of target industrial policies. Therefore, policymakers ought to pay more attention to the consequences of excessive inter-industry competition and unnecessary government subsidies in order to achieve the objectives of increasing the efficiency of corporate investment and fostering sustainable economic development.
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