Fiscal stress and firms’ domestic value added

Abstract

This study investigates the effects of fiscal squeeze on the domestic value-added ratio (DVAR) in firm exports. Based on a tax cancelation in China, we introduce difference-in-differences (DID) estimation and show that local governments’ fiscal stresses significantly reduce the DVAR at the firm level. Firms subjected to stringent financial constraints experience a greater significant decrease in the DVAR, whereas the adverse effect is alleviated in firms receiving more financial support. This study has clear policy implications for regulators concerned with how fiscal policy affects firms’ competitive advantages and DVAR in international trade.