Beggar‐Thy‐Neighbour or Prosper‐Thy‐Neighbour? Assessing the Cross‐Border Spillover Effect of U.S. Government Subsidies on Firm Productivity

ABSTRACT This paper investigates the cross‐border effect of U.S. government subsidies on the total factor productivity (TFP) of Chinese firms by employing a multi‐period Difference‐in‐Differences (DID) and Event Study approach. Our findings show that U.S. government subsidies significantly enhance the TFP of subsidized U.S. firms. However, they induce different effects on Chinese firms depending on their roles along the Sino‐US supply chain and are associated with a reconfiguration of subsidized U.S. firms' supply‐chain relationships toward domestic partners and away from Chinese partners. Government subsidies alleviate the financing constraints faced by subsidized U.S. firms and improve their financial performance, while demand expansion associated with subsidized U.S. firms contributes to productivity gains among their Chinese suppliers. Moreover, the supply‐chain reconfiguration of subsidized U.S. firms disrupts their relationships with Chinese customers, while the improved performance of subsidized U.S. firms intensifies competitive pressure on Chinese rivals and erodes their profit margins, ultimately reducing the TFP of both Chinese customers and rivals.