Industrial Policy and the Shaping of Local Preferences

Abstract:

Industrial policy might enhance welfare if trade does not happen among competitive economies and/or if there are potential dynamic economies of scale or consumer learning to be accounted for. We study the case of Spain where policymakers favored foreign entry of automakers from the very beginning of the automobile industry. Using rich, province-level, market share data going back to the dawn of the Spanish automobile industry we show that entry of a foreign manufacturer triggers a sudden but long-lasting increase in national sales, which is always stronger in the local market where the new assembly plant is located. The national home market advantage disappears quickly after Spain joins the EU in 1986. However, intranational home bias, while smaller in magnitude, strengthens over time. We then estimate an equilibrium, discrete choice demand model of horizontally differentiated products and an oligopolistic supply to show that the remaining home market advantage originated by an industrial policy designed in the autarkic 1950s still amounts to a significant protection of the Spanish domestic market: the equivalent of a 26% tariff against non-European imported vehicles, and a 45% against all models not produced in Spain, compared to a nominal import tariff into the European Union of 10.5%.