The effect of consumer subsidies on firm’s operational efficiency : evidence from China

Abstract

To boost the domestic consumption, Chinese government initiated the “Home Appliances Going to Country” (HAGC) program in the fourth quarter of 2007 and “Cars Going to Country” (CGC) program in the first quarter of 2009. Both programs subsidize the consumers for their purchase of home appliances and automobile products and stimulates the consumption of these subsidized products. A key feature for these subsidy programs is that the participating firms are indirectly granted with the subsidy via the market-based competition for consumers’ preference for their products. Therefore, participating firms can avoid the political costs which are often imposed by other firm-specific subsidy (i.e., producer subsidy) programs, including the investment commitment required by government officials. Therefore, I expect that the consumption subsidy enables firms improve their operational efficiency amid the increased market demand. Using firm’s total factor productivity (TFP) as the proxy for operational efficiency, I find that the firms participating the HAGC and CGC programs have higher TFP after the implementation of the consumption subsidy. Such an improvement is robust to the alternative measures of TFP and the use of industry-matched samples. In addition, the positive effect of consumption subsidy on firm’s operational efficiency is more pronounced for firms without receiving any other firm-specific government subsidy, for firms focusing on the domestic market, and for firms located in the areas with low marketization index. My additional analyses show that the effect of the consumption subsidy can last for as long as two years after the termination of these programs and that the effect is similar for both SOE and non-SOE participating firms. Besides total factor productivity (TFP), I also examine the inventory turnover and firm’s research and development investments. Consistent with the increased TFP for the participating firms, my results show that both HAGC and CGC firms have an improvement in their inventory turnover and that these firms invest more in the R&D activities. These findings shed light on the mechanism through which the participating firms improve their TFP after the implementation of the consumer subsidy policies. Finally, I further show that the stock price performance is better for these participating firms than other firms in the implementation period of the HAGC and CGC policies, suggesting that the investors recognize the positive impacts of the consumer subsidy programs on firm value. Overall, my study extends our understanding of how firms respond to the consumption stimulus measures taken by many governments around the world in the past decade.