VAT Reform, Regional Ownership Structure, and Industrial Upgrading: Evidence From Firms in Northeast China

Abstract

We estimate the extent of the moderating effect of varying regional ownership structures on the relationship between the VAT reform and industrial upgrading in a panel differences-in-differences framework, using a natural experiment of the China’s 2004 value-added tax (VAT) reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the North-eastern regions. Results reveal that the VAT reform helps firms increase their capital-to-labor ratio, labor input, and labor productivity, indicating the positive effect of VAT reform on fixed asset renewal and industrial structure upgrading in the region. As for the role of regional ownership structure, the positive effects of the VAT reform on labor input and labor productivity are significantly suppressed in areas with large market shares of state-owned enterprises. In another words, the VAT reform significantly promotes industrial upgrading in areas with market-sensitive economies.