Setting local economic growth targets: does it mitigate nationwide policy uncertainty?

ABSTRACTInstitutional theory holds that local governance is essential in shaping regional economic activity. This study evaluates whether local economic growth targets offset the detrimental effect of nationwide policy uncertainty on local business performance. Regression analyses of data from industrial firms and manually collected data on city economic growth targets in China show that higher local growth targets result in greater corporate investment, conditional on nationwide policy uncertainty, and that the impact is substantial through financial subsidies and allocating credit resources. However, local discretion in economic growth target setting might cause investment misallocation and efficiency loss.KEYWORDS: local economic growth targetmultilevel policy governancepolicy uncertaintylocal business performancefiscal subsidiescredit resource allocationJEL: E61G38O14O47 DISCLOSURE STATEMENTNo potential conflict of interest was reported by the authors.Notes1. In the empirical analysis, we follow Baker et al. (Citation2016) to construct the EPU index and Huang and Luk (Citation2020) for the robustness check. Baker et al. (Citation2016) constructed indices to quantify economic uncertainty related to policy decisions using the frequency of newspaper coverage. The objective is to measure uncertainty regarding who will be responsible for making economic policy decisions, what actions will be taken and when, and the possible economic outcomes resulting from these actions or inactions. The measurements account for uncertainties concerning both immediate and long-term concerns, as depicted in the newspaper articles. Additionally, the indexes encompass uncertainties concerning non-economic policy matters that may have economic consequences.2. In the later analysis, we also assign the weights 1/78, 2/78 … 12/78 to the 12 months of each year and calculate the yearly index to test for robustness.3. Since businesses are located in the municipal district, the firm fixed effect also includes the city fixed effect, which can absorb the long-term institutional quality that does not change over time (Jiang et al., Citation2019; Wang et al., Citation2021).4. The designed sizes are that corporate business income is more than 5 million yuan before 2011 and 20 million yuan after 2011. Moreover, because the standard of industrial classification varied during the sample period, we unified the classification using the National Industries Classification System (GB/T 4754-2002). The ASIF does not publish new data, so our analysis only covers the period up to 2013. Although the ASIF is well-represented, there is still concern about external validity based on historical data. However, if the mediating effect of economic growth targets remains in the long term, the concern about external validity is not substantiated. Appendix A in the supplemental data online follows the approach of Dell et al. (Citation2012) to reconstruct our data sample and show that the effects are persistent.5. Additionally, we could find that the coefficients of institutional quality are significantly positive in columns (2), (4) and (6). In other words, better institutional quality could attract more corporate investment, consistent with previous literature on institutional quality.6. As stated by Angrist and Pischke (Citation2009), no standard method tests the validity of instrumental variables. However, a common rule of thumb is to set the F-statistic threshold at 10 to check for the presence of the weak instrument issue. A high F-statistic suggests that the instrument is strong and can be used to accurately estimate the causal relationship.7. The bank information is from the Chinese Research Data Services Platform. The municipal government officials include those employed in the Development and Reform Bureau, Municipal State-owned Assets Supervision and Administration Commission, the Finance, Audit, Forestry, Supervision, Public Security, Civil Affairs, and Price Bureaus and the Bureau of Labor and Social Security.8. The wedge between the two is factor share and the elasticity of product substitution. Because we include firm fixed effects in the specification, the two parameters are absorbed. Capital stock is calculated using the perpetual inventory method (Brandt et al., Citation2012).Additional informationFundingThis study was supported by the Social Science Planning Project of Fujian Province [grant number FJ2023MGCA015]; National Natural Science Foundation of China [grant number 72003072]; Humanities and Social Sciences Youth Foundation of China [grant number 21YJC790143]; National Social Science Foundation of China [grant number 21CJY045]; National Natural Science Foundation of China [grant number 72373003]; Fundamental Research Funds for the Central Universities [grant numbers SXYPY202250, SXYPY202358]; Youth Program of Philosophy and Social Sciences of Guangdong Province [grant number GD21YYJ01]; Guangzhou Philosophy and Social Science Project [grant number 2023GZGJ08]; and the Major Program of National Social Science Foundation of China [grant number 20&ZD085].