Imports of key capital goods and firms’ span of production stages: A global value chain perspective

With the rapid development of the digital economy, importing key capital goods has become increasingly critical for industrial upgrading in developing economies, underscoring the importance of policies that facilitate such imports. This paper examines the impact of China’s 2008 import subsidy policy for key capital goods on the span of production stages using a difference-in-differences approach. We find that the policy induces a significant contraction in firms’ span of production stages, effectively substituting domestic production of capital goods with foreign sourcing. Mechanism analysis reveals that this downstream shift is driven by an asymmetric adjustment: constrained by insufficient absorptive capacity and incentives for downstream specialization, firms reduce their import upstreamness more significantly than their export upstreamness. Heterogeneity analyses indicate that these effects are more pronounced for foreign-invested, small and medium-sized, and high labor-intensive firms. These findings shed light on firms’ strategic adaptations within global value chains and offer valuable policy implications for developing economies.