Do export tax rebates promote firm upgrading? Evidences from labor-intensive firms in China

With increasing the low-cost competition in international market, firm upgrading especially for Chinese labor-intensive firms is vital to strengthening their export competitiveness. Using a panel data of Chinese labor-intensive firms for 2001-2013, this paper explores whether export tax rebates (ETR) promote firm upgrading measured by technological sophistication and product quality. Results show that a positively significant effect of ETR on firm upgrading. An increase in ETR rates by 10 % upgrades technological sophistication by 2.3 % and product quality by 2.1 %. Moreover, there exists an inverse-U shaped relationship between the rebate rate and firm upgrading, and the turning point occurs when the rate is at 0.15 for technological sophistication and at 0.13 for product quality. Further mechanism analysis reveals that the internal knowledge creation and international knowledge transfer are two parallel pathways linking ETR and firm upgrading. The effect of ETR on technological sophistication is carried mainly by internal knowledge creation, while international knowledge transfer is more important for upgrading product quality. However, the ETR effects vary across firms with different characters.