Can green industrial policy improve total factor productivity? Firm-level evidence from China

Abstract

Based on unique micro-level data on 18,885 Chinese mining companies, this study explores the effect of tax incentives for green development on mining company total factor productivity (TFP) and its mechanism of influence. The results are as follows. (1) Tax incentives for green development can improve mining companies’ TFP. A 1% increase in tax incentives for mining companies increases TFP by 0.060%. After considering endogeneity and selection bias, our conclusion is still valid. (2) Heterogeneity analysis shows that the positive effect of tax incentives on TFP is more significant for private companies, companies in central and western China and companies in areas with weak environmental controls. (3) There is a two-way causal relationship between tax incentives and TFP, mining companies with higher TFP receive more tax incentives. Further analysis shows that tax incentives improve TFP through technological progress. This study provides Chinese firm-level evidence for the Porter hypothesis.