Imports of Key Capital Goods and Quality Upgrading : Evidence from China's Import Subsidy Policy

This paper examines the impact of capital imports on firms’ export quality upgrading with a subsidy policy for advanced capital imports implemented in China since 2008. Using a matched dataset of firms’ production and custom databases, we employ a DiD strategy that exploits firms’ differential pre-event exposures to the policy. We find that the subsidy increases firms’ imports of subsidized products, and improves their export quality. Furthermore, export quality improvements due to capital imports are larger if (1) firms are more productive; (2) the exporting product is the firms’ core product; (3) the product is a differentiated good; and (4) the destination market is larger and richer. Capital imports also boost firms’ total exports and numbers of exporting destinations and products. Mechanism tests suggest that capital-skill complementarity can explain improved export product quality. Capital goods imports also lead to increased skill management that can improve export quality