Department of Economics
Aalto University School of Business; Svetlana Ledyaeva

Though empirical literature on the effects of export incentives for domestic export is very rich, export incentives’ effects for third countries' export have not yet been examined empirically. This paper sheds some light on this issue. According to existing theory, effects of domestic export incentives for third countries' exporters can be both negative (due to increased competition) and positive (due to input-output linkages in global value chains (GVCs)). This study disentangles between these effects empirically by estimating how export incentives implemented in Brazil, India and China (BICs) in 2009-2015 affected export of other 18 large emerging markets. Exploiting cross-product and cross-country variation over time and using reduced form and structural models, the paper finds that negative competition effects of Indian and Chinese export incentives have caused annual drop in export of affected emerging country on average by 1.51 and 7.53 percentage points, respectively. On the other hand, the study reveals that due to positive “GVCs input-output linkages” effects of Indian and Chinese export incentives, export of affected emerging country has been increasing annually on average by 0.45 and 16.92 percentage points, respectively. There is no evidence of third-country effects of Brazilian export incentives.

Photo: Made in China by Martin Abegglen