IDEAS home Printed from https://ideas.repec.org/a/bla/reviec/v29y2021i4p802-837.html
   My bibliography  Save this article

Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China

Author

Listed:
  • Dongmin Kong
  • Mengxu Xiong

Abstract

This study investigates the effects of tax incentives on export product quality. Using a staggered value‐added tax reform in China as exogenous shocks, our difference‐in‐differences estimation shows that tax cuts causally reduce product quality at the firm‐level (product‐level) by 5.3% (8.6%). A plausible mechanism appears to be the output and export expansion, which crowd out human capital and thus undermine quality. The results are more pronounced for non‐state‐owned firms, firms under high tax reinforcement effort, and firms subjecting to high financial constraints. This study provides clear policy implications by shedding light on the unintended consequences of tax incentives on export product quality.

Suggested Citation

  • Dongmin Kong & Mengxu Xiong, 2021. "Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 802-837, September.
    • Handle: RePEc:bla:reviec:v:29:y:2021:i:4:p:802-837
    DOI: 10.1111/roie.12499
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/roie.12499
    Download Restriction: no
    File URL: https://libkey.io/10.1111/roie.12499?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bee Yan Aw & Mark J. Roberts & Daniel Yi Xu, 2011. "R&D Investment, Exporting, and Productivity Dynamics," American Economic Review, American Economic Association, vol. 101(4), pages 1312-1344, June.
    2. Laura Alfaro & Pol Antràs & Davin Chor & Paola Conconi, 2019. "Internalizing Global Value Chains: A Firm-Level Analysis," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 508-559.
    3. Nicholas Bloom & John Van Reenen & Heidi Williams, 2019. "A toolkit of policies to promote innovation," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 10.
    4. Pol Antras & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," American Economic Review, American Economic Association, vol. 102(3), pages 412-416, May.
    5. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
    6. Fan, Haichao & Li, Yao Amber & Yeaple, Stephen R., 2018. "On the relationship between quality and productivity: Evidence from China's accession to the WTO," Journal of International Economics, Elsevier, vol. 110(C), pages 28-49.
    7. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    8. Wei Tian & Miaojie Yu, 2019. "Input trade liberalization and import switching: Evidence from Chinese firms," Review of International Economics, Wiley Blackwell, vol. 27(4), pages 1002-1020, September.
    9. Yulin Hou & Cem Karayalcin, 2019. "Exports of primary goods and human capital accumulation," Review of International Economics, Wiley Blackwell, vol. 27(5), pages 1371-1408, November.
    10. Xu, Mingli & Kong, Gaowen & Kong, Dongmin, 2017. "Does wage justice hamper creativity? Pay gap and firm innovation in China," China Economic Review, Elsevier, vol. 44(C), pages 186-202.
    11. Thorsten Beck & Ross Levine & Alexey Levkov, 2010. "Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States," Journal of Finance, American Finance Association, vol. 65(5), pages 1637-1667, October.
    12. Chor, Davin & Manova, Kalina & Yu, Zhihong, 2021. "Growing like China: Firm performance and global production line position," Journal of International Economics, Elsevier, vol. 130(C).
    13. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2012. "The Empirics of Firm Heterogeneity and International Trade," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 283-313, July.
    14. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
    15. Zhao Chen & Xian Jiang & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2023. "Tax Policy and Lumpy Investment Behaviour: Evidence from China’s VAT Reform," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(2), pages 634-674.
    16. Norman Gemmell & Richard Kneller & Danny McGowan & Ismael Sanz & José F. Sanz‐Sanz, 2018. "Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(2), pages 372-399, April.
    17. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
    18. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    19. Alexander Klemm & Stefan Parys, 2012. "Empirical evidence on the effects of tax incentives," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(3), pages 393-423, June.
    20. Hu, Jinshuai & Jiang, Haiyan & Holmes, Mark, 2019. "Government subsidies and corporate investment efficiency: Evidence from China," Emerging Markets Review, Elsevier, vol. 41(C).
    21. Wu, Yiyun & Zhu, Xiwei & Groenewold, Nicolaas, 2019. "The determinants and effectiveness of industrial policy in china: A study based on Five-Year Plans," China Economic Review, Elsevier, vol. 53(C), pages 225-242.
    22. Amit K. Khandelwal & Peter K. Schott & Shang-Jin Wei, 2013. "Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters," American Economic Review, American Economic Association, vol. 103(6), pages 2169-2195, October.
    23. Miaojie Yu, 2015. "Processing Trade, Tariff Reductions and Firm Productivity: Evidence from Chinese Firms," Economic Journal, Royal Economic Society, vol. 125(585), pages 943-988, June.
    24. Broda, Christian & Greenfield, Joshua & Weinstein, David E., 2017. "From groundnuts to globalization: A structural estimate of trade and growth," Research in Economics, Elsevier, vol. 71(4), pages 759-783.
    25. Szücs, Florian, 2020. "Do research subsidies crowd out private R&D of large firms? Evidence from European Framework Programmes," Research Policy, Elsevier, vol. 49(3).
    26. Li, Bingjing, 2018. "Export expansion, skill acquisition and industry specialization: evidence from china," Journal of International Economics, Elsevier, vol. 114(C), pages 346-361.
    27. Howell, Anthony, 2016. "Firm R&D, innovation and easing financial constraints in China: Does corporate tax reform matter?," Research Policy, Elsevier, vol. 45(10), pages 1996-2007.
    28. Lennart C. Kaplan & Tristan Kohl & Inmaculada Martínez‐Zarzoso, 2018. "Supply‐chain trade and labor market outcomes: The case of the 2004 European Union enlargement," Review of International Economics, Wiley Blackwell, vol. 26(2), pages 481-506, May.
    29. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
    30. Chi‐Chur Chao & Mong Shan Ee & Xuan Nguyen & Eden S. H. Yu, 2019. "Trade liberalization, firm entry, and income inequality," Review of International Economics, Wiley Blackwell, vol. 27(4), pages 1021-1039, September.
    31. Miaojie Yu & Guangliang Ye & Baozhi Qu, 2013. "Trade Liberalisation, Product Complexity and Productivity Improvement: Evidence from Chinese Firms," The World Economy, Wiley Blackwell, vol. 36(7), pages 912-934, July.
    32. Alfaro, Laura & Asis, Gonzalo & Chari, Anusha & Panizza, Ugo, 2019. "Corporate debt, firm size and financial fragility in emerging markets," Journal of International Economics, Elsevier, vol. 118(C), pages 1-19.
    33. Li, Shengyu, 2018. "A structural model of productivity, uncertain demand, and export dynamics," Journal of International Economics, Elsevier, vol. 115(C), pages 1-15.
    34. ByeongHwa Choi & Volodymyr Lugovskyy, 2019. "Asymmetric effects of financial development on export price and quality across countries," Review of International Economics, Wiley Blackwell, vol. 27(2), pages 594-642, May.
    35. Jiayun Xu & Qilin Mao, 2018. "On the relationship between intermediate input imports and export quality in China," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 26(3), pages 429-467, July.
    36. Sun, Chuanwang & Zhan, Yanhong & Du, Gang, 2020. "Can value-added tax incentives of new energy industry increase firm's profitability? Evidence from financial data of China's listed companies," Energy Economics, Elsevier, vol. 86(C).
    37. Upward, Richard & Wang, Zheng & Zheng, Jinghai, 2013. "Weighing China’s export basket: The domestic content and technology intensity of Chinese exports," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 527-543.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yang, Shubo & Jahanger, Atif & Hossain, Mohammad Razib & Wang, Yanming & Balsalobre-Lorente, Daniel, 2023. "Enhancing export product quality through innovative cities: A firm-level quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 462-478.
    2. Wu, Jianjun & Ding, Xiuying & Liu, Xuemei, 2023. "Governmental pressures and firms’ export product quality: Evidence from China," Finance Research Letters, Elsevier, vol. 55(PA).
    3. Sun, Churen & Wu, Han, 2023. "The impact of export VAT rebate on firm-product markups: Evidence from Chinese industrial enterprises," Economic Modelling, Elsevier, vol. 119(C).
    4. He, Zhenyu & Tang, Yuwei, 2023. "Local environmental constraints and firms’ export product quality: Evidence from China," Economic Modelling, Elsevier, vol. 124(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sun, Chuanwang & Zhan, Yanhong & Gao, Xiang, 2023. "Does environmental regulation increase domestic value-added in exports? An empirical study of cleaner production standards in China," World Development, Elsevier, vol. 163(C).
    2. Defever, Fabrice & Imbruno, Michele & Kneller, Richard, 2020. "Trade liberalization, input intermediaries and firm productivity: Evidence from China," Journal of International Economics, Elsevier, vol. 126(C).
    3. Bai, Xue & Hong, Shengjie & Wang, Yaqi, 2021. "Learning from processing trade: Firm evidence from China," Journal of Comparative Economics, Elsevier, vol. 49(2), pages 579-602.
    4. Hongkui Liu & Ming Xu & Tenglong Zhong, 2019. "Import Competition and Export Markups: Evidence from Chinese Multi-Product Exporters," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 357-385, May.
    5. Manova, Kalina & Yu, Zhihong, 2017. "Multi-product firms and product quality," Journal of International Economics, Elsevier, vol. 109(C), pages 116-137.
    6. Xinheng Liu & Ziyuan Pan & Dongli Fang, 2023. "Agglomeration, resource reallocation and domestic value‐added ratio in exports," Growth and Change, Wiley Blackwell, vol. 54(1), pages 182-213, March.
    7. Maria Bas & Caroline Paunov, 2019. "What gains and distributional implications result from trade liberalization," Documents de travail du Centre d'Economie de la Sorbonne 19003, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    8. Bas, Maria & Paunov, Caroline, 2021. "Disentangling trade reform impacts on firm market and production decisions," European Economic Review, Elsevier, vol. 135(C).
    9. Michele Imbruno, 2022. "Export adjustment to input trade liberalization: The role of import wholesaling services," Review of International Economics, Wiley Blackwell, vol. 30(3), pages 764-795, August.
    10. Jamil, Nida & Chaudhry, Theresa Thompson & Chaudhry, Azam, 2022. "Trading textiles along the new silk route: The impact on Pakistani firms of gaining market access to China," Journal of Development Economics, Elsevier, vol. 158(C).
    11. Zhang, Hongsheng & Wei, Yueling & Ma, Shuzhong, 2021. "Overcoming the “Solow paradox”: Tariff reduction and productivity growth of Chinese ICT firms," Journal of Asian Economics, Elsevier, vol. 74(C).
    12. Xianhai Huang & Yi Wang & Zhujun Zhu & Xueyin Song, 2022. "Quality of imported intermediates, innovation behaviour and markups: Firm‐level evidence from China," The World Economy, Wiley Blackwell, vol. 45(9), pages 2796-2819, September.
    13. He, Zhenyu & Tang, Yuwei, 2023. "Local environmental constraints and firms’ export product quality: Evidence from China," Economic Modelling, Elsevier, vol. 124(C).
    14. Ming Xu & Tenglong Zhong & Qian Xie & Hongkui Liu, 2022. "Foreign Demand, Competition Strategy, and Export Markups: Evidence from Chinese Multi‐Product Exporters," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 30(3), pages 187-209, May.
    15. Chor, Davin & Manova, Kalina & Yu, Zhihong, 2021. "Growing like China: Firm performance and global production line position," Journal of International Economics, Elsevier, vol. 130(C).
    16. Hayakawa, Kazunobu & Ito, Tadashi & Mukunoki, Hiroshi, 2022. "Lerner meets Metzler: Tariff pass-through of worldwide trade," Journal of the Japanese and International Economies, Elsevier, vol. 63(C).
    17. Hu, Cui & Parsley, David & Tan, Yong, 2021. "Exchange rate induced export quality upgrading: A firm-level perspective," Economic Modelling, Elsevier, vol. 98(C), pages 336-348.
    18. Bie, Xiaodong & Ciani, Andrea, 2021. "Born similar, develop apart: Evidence on Chinese hybrid exporters," DICE Discussion Papers 364, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    19. Albert Guangzhou Hu & Zhengning Liu, 2014. "Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 488-512, August.
    20. Crinò, Rosario & Bonfiglioli, Alessandra & Gancia, Gino, 2021. "International Trade with Heterogeneous Firms: Theory and Evidence," CEPR Discussion Papers 16249, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reviec:v:29:y:2021:i:4:p:802-837. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.