"Owning More of the Chain : Capital Subsidies and Firm-Level Upstream Shifts in China"

Abstract : This paper examines the causal effect of China’s capital-goods import subsidy on firms’ production organization from a global value chain perspective. Implemented through the Catalogue for the Guidance of Importing Technologies and Products, the policy subsidized high-tech equipment to promote industrial upgrading and deeper GVC integration. A partial-equilibrium model shows that lower equipment rental rates reduce stage-specific marginal costs and expand firms’ span of integration, with stronger effects in capital-intensive upstream stages. Guided by this framework, the empirical analysis combines matched firm-product-year customs and production data in a difference-in-differences design around the 2008 rollout. Treated firms expanded their span of production stages, with effects concentrated on upstream imports ; on average, the span increased by about 0.14 stages. Event studies show flat pre-trends, placebo tests yield null effects, and robustness checks confirm results. These findings demonstrate how targeted equipment subsidies can accelerate vertical upgrading and reposition firms within global value chains.