Firm investment and exporting: Evidence from China's value-added tax reform

• Published in: Journal of international economics Vol. 97; no. 2; pp. 392 - 403
• Main Authors: Liu, Qing, Lu, Yi
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.11.2015; Elsevier Sequoia S.A
• Subjects: Causality; China; Difference-in-differences; Exporting behavior; Exports; Fixed investment; Foreign direct investment; Foreign investment; Investments; Organizational behavior; Organizational behaviour; Regional differences; Studies; Tax reform; Taxation; Value; Value-added tax reform; Value-added taxes; VAT; China; Fixed investment; Value-added tax reform; F10; G31; C23; Exporting behavior; Difference-in-differences
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2015.07.003

This paper contributes to the literature by identifying the causal effect of firm investment on exporting behavior. The identification hinges on regional variations in the 2004 value-added tax pilot reform in China, which generated positive investment shocks. The instrumental variable estimation results show that firm investment significantly and substantially increases the likelihood of exporting, and this effect is largely due to the positive effect of firm investment on firm productivity. Finally, the paper documents some heterogeneity of the effect across industries with different degrees of competition and financial constraints. •We identify the causal effect of firms' fixed investment on their exporting behavior with the Difference-in-Differences method.•Our results show that fixed investment significantly and substantially increases the likelihood of exporting.•We document some heterogeneity of the effect across industries with different degrees of competition and financial constraints.