Location-based tax incentives and entrepreneurial activities: evidence from Western Regional Development Strategy in China

This paper investigates the effect of location-based tax incentives on local economy through attracting entrepreneurial activities in the context of China. We exploit the differentials in the entry of new private firms across counties on the border of China’s Western Regional Development Strategy (WRDS). This strategy introduces an 18% reduction in corporate income tax rates for firms in the western areas in China after 2000 if they belong to the sectors encouraged by the central government. Comparing contiguous border county pairs in a triple difference-in-difference framework, we find that the increase in the number of new entrants eligible for tax reduction is larger in the treatment counties than in the control ones. We also find that new entrants increase in treated counties not at the cost of significant loss in nearby untreated counties. Our further analysis shows that whether a treatment county is more favored by new firms due to tax incentives depends on its local industrial base and market environment.