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

a r t i c l e i n f o 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. 1. Introduction " The key unanswered question is how firms obtain the characteristics that allow them to easily enter the export market. " Bernard and Jensen (2004) A robust finding from recent firm-level analyses is that exporters are more productive than non-exporters (for a review of empirical evidence , see Bernard et al., 2012). The leading explanation is that firms with better characteristics (such as productivity) self-select into export markets (for a review of firm heterogeneity theories, see Redding, 2011). However, a question that continues to intrigue researchers is how firms obtain superior characteristics to facilitate their entrance into the export market, as exemplified in the above quotation. Recent literature has emphasized the importance of firm investment in technology upgrading for successful exporting (see, for example, Damijan et al., 2008; Cassiman et al., 2010; Iacovone and Javorcik, 2012). However, there is an inherent empirical challenge to establish the causality from firm investment to exporting; that is, investment and exporting decisions are jointly determined. (2011) all model the simultaneous selection of investment in technology upgrading and exporting. Meanwhile, another complication in the identification is that there could be reverse causality from exporting to investment. For example, Criscuolo et al. (2010) find that among several thousand U.K. enterprises across all industries in 1994–2000, those engaging globally spend more resources on innovation. This paper contributes to the literature by using a quasi-natural experiment to identify the causal effect of firm investment on firm exporting. In 2004, China started to reform its value-added tax (VAT) system in six broadly defined industries in the three northeastern provinces. 1 Under the new taxation system, the purchase of fixed assets can be deducted from the tax base, which substantially lowers the cost of fixed assets (e.g., by 13 to 17%) and hence generates substantial tax incentives for …