Subsidies along Value Chains and their Impacts on China's Exports

Industrial subsidies are at the center of the recent political and economic debate. This paper examines the impacts of subsidies along domestic value chains on the export performance of Chinese firms. Using firm-level subsidy data and inter-provincial input-output tables, we measure direct subsidies and indirect subsidies in upstream industries. Our findings reveal several vital points: (1) Direct subsidies significantly enhance Chinese firms' export participation and volume. These subsidies are positively associated with firm investment and R&D expenditure. (2) Surprisingly, upstream indirect subsidies-particularly those from 1st tier upstream industries-have even larger effects on Chinese exports than direct subsidies. These upstream subsidies contribute significantly to export growth. (3) Both domestic firms and foreign-invested enterprises benefit from direct subsidies, but the effect of upstream subsidies varies by ownership. (4) Both direct and indirect subsidies are associated with higher export prices and product quality, leading to a lower quality-adjusted price. These export growth and quality upgrading are driven by direct subsidies through increased investment and R&D, and indirect subsidies through intermediate inputs. These results suggest that government support may promote quality upgrading and enhance the global competitiveness of Chinese exports. This paper contributes to the ongoing debate on government subsidy and industrial policy by shedding light on the intricate relationship between subsidies and exports.