Industrial policy, aimed at shaping a nation's industrial structure, is widely adopted globally. China's MIC 2025, launched in 2015, represents a significant techno-industrial policy focused on indigenous innovation and global manufacturing leadership. Unlike previous Chinese industrial policies, MIC 2025 uniquely employs policy experimentation through pilot cities, prioritizing local government involvement. Existing literature examining the effects of Chinese industrial policies often relies on the Five-Year Plans (FYPs), which are comprehensive frameworks encompassing various aspects of economic and social development. However, the FYPs lack the focused policy instruments and the localized experimentation characteristics of MIC 2025. Furthermore, previous studies analyzing MIC 2025 predominantly focus on sector-based effects, neglecting the critical role of place-based policy experimentation via pilot cities. This research addresses this gap by examining whether and how MIC 2025, specifically its pilot city implementation, impacts firm innovation. The study aims to provide a clearer understanding of the effectiveness of MIC 2025's unique approach and resolve contradictory findings in the existing literature concerning its impact on firm innovation.

The literature on industrial policy is marked by a debate regarding its efficacy. Proponents argue that targeted industrial policies can incentivize innovation by allocating resources to competitive sectors. Conversely, critics highlight potential government failures, such as information asymmetry and crowd-out effects, leading to incentive distortions and reduced R&D investment. The existing research on MIC 2025 presents conflicting empirical results on its impact on firm innovation. Some studies suggest that MIC 2025 promotes R&D investment and outward foreign direct investment (OFDI), while others contend that it has no significant effect or even negative consequences. These conflicting findings stem partly from using broader policies like FYPs or solely considering sector-based effects, neglecting the crucial role of place-based policy experimentation through pilot cities. This study utilizes the pilot city program as a quasi-natural experiment to overcome the limitations of previous research designs and gain a clearer understanding of MIC 2025's impact on firm innovation.

This study employs a quasi-natural experiment using MIC 2025 pilot cities as the treatment group and non-pilot cities as the control group. The sample comprises 4422 firm-year observations of Chinese listed manufacturing firms from 2012 to 2022, focusing on the ten priority sectors of MIC 2025. To address potential selection bias, the researchers utilize propensity score matching (PSM) to create a balanced sample. A propensity score matching-difference-in-differences (PSM-DID) model is used to estimate the treatment effect of being located in a pilot city on firm innovation, measured by the number of invention patents and non-invention patents. The parallel trend assumption is tested using a dynamic regression model. Robustness checks include placebo tests to rule out the influence of random time trends and endogeneity tests examining the role of city-specific economic and political factors in pilot city selection. Mechanism analysis is conducted to explore the channels through which MIC 2025 affects innovation, focusing on the roles of tax incentives, public subsidies, convenient financing, academic collaboration, and talent incentives. Heterogeneity analysis explores variations in the treatment effect across geographical regions (eastern, central, and western China), industries (high-tech vs. non-high-tech), and firm characteristics (SOEs vs. non-SOEs, large vs. small firms). Finally, analysis of economic performance examines the effects of MIC 2025 on Tobin's Q and Total Factor Productivity (TFP) and investigates the potential spillover effects to neighboring cities.

The PSM-DID analysis reveals a statistically significant positive effect of being located in MIC 2025 pilot cities on firm innovation, specifically an increase in invention patents and a decrease in non-invention patents, suggesting an improvement in innovation quality. The parallel trend assumption is validated, confirming the plausibility of causal inference. Robustness tests, including placebo and endogeneity tests, support the main findings. Mechanism analysis demonstrates that the positive impact of MIC 2025 is mediated through resource incentives (tax incentives, public subsidies, and convenient financing) and competitive incentives (academic collaboration and talent incentives). The overall mediation effect of these five mechanisms is approximately 20%, with convenient financing and academic collaboration playing the most significant roles. Heterogeneity analysis reveals that the positive effect of MIC 2025 is more pronounced in western China and for state-owned enterprises (SOEs). Further analysis shows a significant positive impact on firms' Tobin's Q and TFP, indicating improved economic performance. Finally, a significant spillover effect is observed on firm innovation in nearby cities, though this effect is delayed, becoming apparent after two to three years.

The findings of this study address the central research question by demonstrating a positive and causal link between the MIC 2025 pilot city program and firm innovation performance in China. The results contribute to the industrial policy literature by highlighting the importance of place-based policy experimentation and the synergistic effects of central-local government interactions. The study demonstrates that the success of MIC 2025 is not solely attributable to sector-specific policies but significantly depends on the localized implementation and the provision of various policy instruments by the pilot cities. The mechanism analysis offers insights into the specific channels through which MIC 2025 fosters innovation. The significant positive impact on economic performance further strengthens the case for the effectiveness of the policy. The findings have implications for policymakers in China and other developing economies seeking to improve innovation through industrial policies.

This study contributes to the understanding of industrial policy implementation by demonstrating the effectiveness of place-based policy experimentation in promoting firm innovation, using the MIC 2025 program as a case study. It highlights the crucial role of central-local government interaction and the provision of diverse policy instruments in achieving policy objectives. Future research could explore the dynamics of policy learning across pilot cities and the long-term effects of MIC 2025, including its impact on different sectors and firm sizes, incorporating data beyond listed firms and expanding the analysis to include other aspects of innovation, such as green and digital innovation.

The study's limitations include the focus on listed manufacturing firms, potentially limiting the generalizability of the findings. The use of patent applications as a proxy for innovation may not fully capture all dimensions of innovation activity. Future studies should consider broader innovation measures and expand the sample to include unlisted firms. The analysis primarily focuses on the ten sectors explicitly supported by MIC 2025, and further research is needed to assess the policy's impacts on other sectors and the presence of any inter-sectoral spillovers. Lastly, the study acknowledges the limitation of utilizing readily available data which may not capture all nuances of the intricate interactions between the central government and local governments.