Killing a Second Bird with One Stone? Promoting Firm Growth and Export through Tax Policy

In this paper we test whether policies that induce tangible asset growth among domestic companies are effective in increasing their entry into export markets. We solve the endogeneity problem inherent to the empirical investigation of the growth-export relationship by adopting an instrumental variable (IV) strategy that exploits an exogenous policy variation in corporate tax (CT) rate as an instrument for firm growth. A reduction of the CT rate in France is found increasing firm size and promoting through this channel export entry. Our result is robust to two alternative identification strategies: first we compare firms that enjoyed CT reduction against those that did not benefit from it, then we exploit the differential impact of statutory rate reduction on the firm-level effective marginal and average rates of taxation (EMTR and EATR) within the group of firms eligible for tax reduction. We conclude that the fiscal lever has a direct impact on firm size and an indirect impact on export participation.