Air pollution and the domestic value-added for Chinese exporters

Abstract

This paper evaluates the causal effect of air pollution on the share of domestic value-added in exports for Chinese exporters. Precipitation is employed as an instrument for air pollution to alleviate the endogeneity. Our baseline instrument variable estimation identifies a significant and negative effect of air pollution on the share of domestic value added in exports. Specifically, each 1 mg/m 3 increase in yearly PM 2.5 exposure is associated with 3.144 7 units decrease of the domestic value-added rate of firms’ exports.This result holds when wind speed,air flow index and thermal inversions are used as alternative instruments. Further, it is shown that air pollution is detrimental to the health of employees, and also has negative effect on firms’ productivity as well as firms’innovation capacity. All of these may have a negative effect on domestic production and therefore reduce the share of value added done domestically. Lastly, greater effect is found for the central region, the east of Hu Huanyong line, cities of low altitude and high pressure, and also for foreign-invested firms. This paper provides empirical evidence that air pollution may affect the organization of global production, i.e., the share of domestic value added in Chinese exports, and it certainly contributes to more comprehensive understanding of the effect of air pollution.