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Industrial Policy and Local Manufacturing
Industrial policy typically aims to develop large-scale formal manufacturing. This paper shows that its effects extend to small-scale, often informal, manufacturing. Using firm-level data from Ethiopia and a shift-share research design, we estimate the effects of national industrial policy on local manufacturing across the entire firm size distribution. We document positive effects on small-scale manufacturing activity and employment. We provide suggestive evidence that these effects are driven, at least partly, by higher local income and consumer demand, which stimulate activity and employment among small firms serving local markets. We find limited evidence of production linkages between small and large firms.
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