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| Industry-wide Subsidy Externality and Technical Structural Changes in Firms' Import Trade |
| PI Jiancai, LUO Yuhan
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| School of Economics, Nanjing University |
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Abstract The new development paradigm features dual circulation, in which domestic and foreign markets reinforce each other, with the domestic market as the mainstay. Since joining the World Trade Organization, Chinese enterprises have improved their productivity through high-technology imports. However, in the complex and volatile international environment, such imports also increase the risk of the supply chain. Given the varying importance of different technology types in trade, it is reasonable and necessary to focus on the technical structure of trade rather than just its scale.
Subsidy policies targeted at specific firms can have an important impact on the input decisions of other firms in the same domestic industry, which in turn affects the technical structure of these firms' import trade. However, this phenomenon has received little attention in the existing empirical literature. The primary channels for these externalities are the intermediate input and product markets. Subsidized firms, with additional supports, increase their demand for intermediate inputs, driving up domestic prices (referred to as the demand effect). They can also adopt more diverse competitive strategies at lower costs, increasing market competition for other firms (referred to as the competition effect).
The demand effect motivates firms within the same industry to import to mitigate the impact of rising domestic input prices. This effect mainly manifests as an increase in the prices of low-technology goods. For subsidized firms, expanding low-technology inputs is easier and faster than high-technology counterparts due to higher associated costs. Low-technology goods, being more homogeneous, can transmit price shocks across the nation more easily. Thus, the demand effect primarily encourages other firms to import low-technology goods as substitutes for their current inputs.
The competition effect motivates firms to import high-technology goods to enhance their product competitiveness and alleviate increased competitive pressures. Whether improving existing products or developing new ones, importing high-technology goods offers more learning opportunities than low-technology ones. Therefore, the competition effect primarily promotes the import of high-technology goods.
We use matched data from the Chinese Annual Survey of Industrial Enterprises and the Customs Database to examine the potential relationship between the aforementioned externalities of subsidies and the technical structure of import trade by Chinese firms. This paper shows that when the subsidy intensity in an industry increases, the technical structure of imports shifts towards high technology. The mechanism analysis indicates that both demand and competition effects exist, though the former has a relatively weaker impact. The further analysis reveals a significant increase in the scale of high-technology imports. Although supply chain risks objectively increase, they are partially manageable because firms tend to import goods with domestic exporter guarantees.
Compared to existing literature, the main contributions of this paper are reflected in the following three aspects. First, this paper focuses on the import trade technical structure of enterprises, which is closely related to key issues such as the autonomy and controllability of industrial chains and high-level opening-up. Second, this paper explores the impact of subsidies on the import trade technical structure from the perspective of externalities, providing a supplement to the existing literature. Third, this paper discusses and examines the specific mechanism of industry-wide subsidy externalities on the import trade technical structure.
The findings in this paper have important policy implications. First, the government should comprehensively assess the impact of subsidy policies on other non-beneficiary firms in the same industry, ensuring that policies consider both direct and indirect effects. Second, the government should carefully manage the input price fluctuations caused by the demand effect to minimize adverse impacts on related firms. Third, the government should support enterprise transformation and upgrading to fully leverage the positive effects of the competition effect. Fourth, the government should establish and improve supply chain risk management mechanisms.
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Received: 10 May 2024
Published: 02 January 2025
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