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This study investigates the impact of the value-added tax reform in services on enterprise upgrading during China’s transition. We found that the reform significantly accelerates the process of enterprise upgrading by using data on China’s listed companies from 2009 to 2017 and a difference-in-differences approach. Heterogeneous analyses show that the impact of the reform is mainly manifested in non-state-owned enterprises. We also find that quality upgrading (value-added) plays a dominant role, while the potential of total factor productivity is not fully exploited yet. Tax reduction, investment in innovation, specialization, and factor allocation are major pathways to achieving enterprise upgrading. These findings provide implications for transitional economies in promoting enterprise upgrading through tax incentives.

Does value-added tax reform in services accelerate enterprise upgrading? Micro evidence from China