Are export tax rebates patronage for Chinese firms?

Abstract

This paper examines the nexus between export tax rebates and productivity using Chinese firm-level data from 2000 to 2007. The empirical findings indicate that a one percentage point decrease in export tax rebate rates increases the total factor productivity (TFP) of a firm by about 0.1 percentage points. We explore the possible mechanisms that explain this nexus and attribute it to the allocation effect of export tax rebate policy; that is, export tax rebates prevent low-productivity firms from exiting the market and further reallocate resources and economic activities to them. In addition, a decrease in rebate rates significantly encourages the TFP growth of surviving firms and leads to an increase in aggregate TFP. Specifically, throughout 2000-07, the declining rebate rates accounted for 5.23% of the rise in the aggregate TFP, and the between-firm effect was 3.85%, which is much larger than the within effect.

Keywords: export tax rebates, productivity, allocation effect, TFP decomposition JEL code: F14, D24, H20, O31