Tax reform and corporate vertical integration: evidence from China

Vertical integration involves expanding a firm's business activities across multiple interconnected sectors, serving as a crucial strategy for securing scarce resources and strengthening core competitiveness. This study uses a difference-in-differences approach to examine whether and how tax reform that reduces value-added tax (VAT) rates affects corporate vertical integration. Using a sample comprising 21,356 firm-year observations from Chinese firms, the results reveal that VAT tax reform significantly enhances corporate vertical integration primarily by mitigating internal and external financing constraints. The effects of the tax reform are more pronounced among enterprises that are state-owned, in the manufacturing industry, that have high tax burdens or elevated debt levels, and those exposed to Sino-US trade conflicts. These results highlight that targeted tax strategies can effectively promote industrial development and reinforce supply chain resilience, especially during periods of deglobalization. These findings deepen our understanding of how fiscal policy shapes corporate behaviour and industrial structures.