Subsidies Fade, Liberalization Lasts: IMF Explores Global Industrial Policy Outcomes

Industrial policies (IPs) have re-emerged as a prominent tool in both developed and emerging economies, driven by shifting geopolitical dynamics and economic challenges. The International Monetary Fund’s Research Department, through a collaborative effort by Rafael Machado Parente, Sandra Baquie, Yueling Huang, Florence Jaumotte, Jaden Kim, and Samuel Pienknagura, explores this global phenomenon in their 2025 working paper. Combining firm-level data from the ORBIS database and policy-level data from the Global Trade Alert (GTA), the researchers conduct a rigorous empirical assessment covering over two million firms in 38 countries between 2011 and 2018. They evaluate the impact of protectionist domestic subsidies, export incentives, and liberalizing trade measures on firm outcomes such as value added, productivity, payroll, and capital investment.

The study employs local projection methods to trace short- and medium-term dynamics and focuses on how policy effectiveness varies across firms, industries, and international contexts. Rather than offering a blanket endorsement or critique of IPs, the paper shows that their impact is far from uniform; firm performance outcomes differ significantly depending on the instrument, the firm's characteristics, and the structure of the industry in which they operate.

Protectionist Policies Deliver Mixed, Short-Lived Gains

The analysis shows that protectionist domestic subsidies, often distributed through financial grants or loan guarantees, initially boost firm performance. Within one to two years of implementation, average firms experience a modest 1% increase in value added, productivity, and payroll. Yet these gains prove temporary. Over the medium term, these metrics regress, and only capital investment continues to trend upward, suggesting that subsidies might encourage physical expansion without sustained improvements in productivity or output.

The findings are less favorable for export incentives, another common protectionist tool. Firms tend to contract initially, with value added, productivity, and capital all falling by approximately 1% in the first two years. These declines, however, tend to fade over time, and total factor productivity (TFP) shows signs of recovery by the third year. The authors attribute this to “learning by exporting,” where firms initially incur adjustment costs before reaping the longer-term benefits of expanded international exposure. Nevertheless, such gains remain limited and slow to materialize, indicating that these incentives may not always achieve their intended outcomes at the aggregate firm level.

Trade Liberalization Shows More Consistent Benefits

Unlike protectionist tools, liberalizing trade barriers, such as reductions in import tariffs, demonstrate a more robust and sustained positive impact. Two years after the implementation of such policies, firms exhibit 1–2% increases in value added and productivity, confirming longstanding economic theory that competition drives innovation and efficiency. These gains, however, come with little change in capital stock or payroll, signaling that liberalizing policies tend to improve resource use rather than stimulate expansion in inputs like labor or capital.

Importantly, liberalizing policies also generate positive spillovers across supply chains. Firms downstream and upstream from the targeted sector benefit through improved access to cheaper or higher-quality inputs and more competitive markets. The size and consistency of these spillovers often surpass those observed with protectionist measures, making liberalizing policies more attractive from an aggregate efficiency perspective.

Young, Credit-Constrained Firms Benefit Most

A significant contribution of the study lies in its detailed analysis of firm-level heterogeneity. The authors show that the benefits of industrial policies are far more pronounced for younger and financially constrained firms. For example, young firms (in the lowest age tercile) enjoy a 2% increase in value added following a subsidy, while older firms see only a 0.5% rise. Similarly, firms with low cash flow-to-assets ratios (a proxy for credit constraints) experience more sustained capital accumulation when targeted by subsidies. These patterns suggest that industrial policies can effectively address financing gaps and frictions faced by small and emerging firms.

Export incentives also result in a faster recovery and stronger gains among young and financially constrained firms. While older firms experience deeper initial losses and weaker rebounds, younger ones often bypass the worst of the adjustment costs and begin to benefit earlier. By contrast, the effects of trade liberalization are more uniform across firm types, likely due to the broader and less discretionary nature of such policies.

Sectoral Distortions and Global Spillovers Add Complexity

The paper underscores that the structure and distortion levels of the targeted industry also shape policy outcomes. By combining industry markups and external financial dependence into a composite distortion index, the researchers find that industrial policies are more effective in sectors with higher distortions, such as pharmaceutical manufacturing or shipbuilding. In these sectors, value added and capital accumulation respond more favorably to IPs, while low-distortion industries show muted or negligible effects.

Furthermore, cross-sectoral and international spillovers add another layer of complexity. Protectionist IPs in upstream sectors enhance downstream firm performance by improving the supply of inputs. Conversely, protectionist IPs aimed at downstream sectors tend to hurt upstream suppliers due to reduced demand. In contrast, liberalizing policies show positive spillovers in both directions. Internationally, the effectiveness of a country’s protectionist IPs diminishes when geopolitical rivals implement similar policies in the same industry. Liberalizing IPs, however, becomes even more beneficial in this context, likely due to relative trade advantages gained in a global protectionist environment.

The researchers reinforce their findings through robustness checks, including instrumental variable strategies, difference-in-differences methodologies, and alternate policy intensity metrics. Across all models, the core insights remain consistent.

The IMF’s study delivers a powerful message: industrial policies are not universally beneficial or harmful; they must be carefully designed, selectively applied, and always evaluated in context. While subsidies and export incentives may provide targeted relief to struggling firms or sectors, their aggregate benefits are often modest and short-lived. Trade liberalization, meanwhile, offers more consistent and broadly shared gains. Crucially, the study emphasizes that industrial policy is no silver bullet, and its ultimate effectiveness depends on thoughtful targeting, market structure, and global dynamics.