VAT Credit Refund Policy and Outward Foreign Direct Investment: Firm-level Evidence from China

We employ China's 2018 value-added tax credit refund reform as a quasi-natural experiment to investigate the policy's impact on firms' outward foreign direct investment (FDI). We find that the policy significantly promotes firms' outward FDI through improved liquidity, increased risk-taking capacity, and heightened innovation incentives. The effect is stronger for non-state-owned enterprises, high-tax-burden firms, credit-accumulating firms, and those with limited tax-shifting capacity. The policy also expands outward FDI diversification across countries and industries. Additionally, we evaluate the policy's effects from a supply chain perspective, revealing that affected supplier firms can substantially enhance their customer firms' outward FDI through supply chain transmission mechanisms.