Government subsidization and corporate product strategies: evidence from Chinese exporters

Abstract

PurposeThis study aims to take advantage of exporters’ product codes and examine the effects of government subsidization on corporate product strategies by focusing on the dimension of product differentiation.Design/methodology/approachThis study uses harmonized system (HS) product codes to construct a novel measure of product differentiation among a sample of Chinese exporters during 2000–2012. It uses propensity score matching to construct a comparable sample of control firms for exporters receiving government subsidies, and then a difference-in-differences (DID) analysis is conducted.FindingsThis study finds that product differentiation decreases immediately upon receiving a government subsidy. This finding suggests that in an emerging market, firms use their subsidy to imitate competitors rather than increase innovation. Further analyses show that this effect is concentrated among wholly foreign-owned enterprises and firms that focus on general trade rather than processing trade. In addition, the authors find some evidence that government subsidization leads to an increase in the number of product lines and decreases in domestic value added and export product quality.Originality/valueThis study constructs a novel measure of product differentiation for a large sample of Chinese exporters and provides insights that government subsidization can affect corporate product strategies.