Abstract
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.
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Notes
One exception is Chaurey (2016).
These provincial regions include Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shanxi, Gansu, Ningxia, Qinghai, Xinjiang, Inner Mongolia, and Guangxi.
A substantial literature exists on this subject and they reach little consensus on the definitions of entrepreneurial activities. Tyson et al. (1994) group the traditional definitions into four major categories: (1) entrepreneurship as innovation; (2) entrepreneurship as risk-sharing; (3) entrepreneurship as stabilizing force; and (4) entrepreneurship as founding or owning and managing a small business. Our use of new entrants in the private sector is consistent with the fourth category.
Introducing a county-year fixed effect helps control for the possibility that control counties may enjoy tax incentives in other programs.
We use the data on 1999.
We consider the data on 1999.
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Acknowledgements
We thank the National Natural Science Foundation of China (No. 71573054 and No. 71503159). Zhikuo Liu gratefully acknowledges support from Chenguang Program supported by Shanghai Education Development Foundation and Shanghai Municipal Education Commission (No.15CG39) and Program for Innovative Research Team of Shanghai University of Finance and Economics. Jianfeng Wu thanks the MOE Project of Key Research Institute of Humanities and Social Sciences at the China Center for Economic Studies (CCES) and the Research Institute of Chinese Economy (RICE), Fudan University, for generous funding. Jianfeng Wu also thanks School of Economics (SOE), Fudan University, for providing access to the firm database.
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Liu, Z., Wu, H. & Wu, J. Location-based tax incentives and entrepreneurial activities: evidence from Western Regional Development Strategy in China. Small Bus Econ 52, 729–742 (2019). https://doi.org/10.1007/s11187-017-9982-3
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DOI: https://doi.org/10.1007/s11187-017-9982-3