Human capital and domestic value added in exports: evidence from China

Based on the data of Chinese manufacturing firms from 2000 to 2006, this study takes the university enrolment expansion policy implemented by the Chinese government in 1999 as a quasi-natural experiment, and uses the difference-in-difference (DID) method to identify the effect of human capital expansion on the ratio of domestic value added in exports to gross exports (DVAR) of firms. Results show that human capital expansion significantly improves the firms' DVAR through the 'intermediate product substitution' channel (promoting firms to use more domestic intermediate inputs to replace imported intermediate inputs in production) and the 'markup' channel (promoting the increase of firms' markup). At the same time, significant heterogeneity exists in the effects of human capital expansion on the DVAR of different types of firms. These results provide new empirical evidence from the perspective of firm DVAR for further understanding of the microeconomic effects of human capital.