How air pollution lowers the domestic value-added ratio in exports: an empirical study of China

This paper analyzes the theoretical mechanism and transmission channel for the impact of air pollution on firms’ domestic value-added ratio (DVAR) in exports. Based on the matched Chinese Industrial Enterprises Database and China Customs Enterprise Database, the DVAR in exports is measured, and this mechanism is empirically tested with standard measurement methods. The study concludes that air pollution is not conducive to raising the DVAR during the sample period. This conclusion remains robust to many issues, such as endogeneity, measurement error, extension of the sample interval, substitution of the air pollution index, and policy changes. The impact of air pollution on the DVAR varies by the type of firm ownership, size, and age, as well as the size and location of the city. In addition, the negative impact of air pollution on the DVAR grows with increases in the PM2.5 concentration. The growing factor prices of domestic intermediate goods and the falling productivity due to air pollution are important transmission channels for the negative impact of air pollution on the DVAR. In order for firms to open up on all fronts through quality trade development, we recommend the prevention and control of air pollution, fueling internal driving forces for firms’ independent innovation, and encouraging firms to target the medium- and high-end markets.