New VAT Revenue-Sharing Incentives and Manufacturing Firms' Return from Finance to the Real Economy

Building a modern industrial system underpinned by the real economy is a core requirement of China's industrial development in its new stage of development. As manufacturing constitutes the mainstay of the real economy, guiding manufacturing firms to return from finance to the real economy is important for boosting investment in the real economy and promoting its development. Against the backdrop of the 2016 reform of incremental value-added tax revenue sharing, this paper employs an intensity-based difference-in-differences model to analyze how prefecture-level city governments' orientation toward manufacturing development, induced by tax revenue-sharing incentives, promoted manufacturing firms' return from finance to the real economy. The study finds that revenue-sharing incentives significantly advanced this process among listed manufacturing firms, as reflected in a decline in their level of financialization. The analysis indicates that, under revenue-sharing incentives, local governments markedly increased their attention to manufacturing development and provided guidance and support for firms to strengthen investment in the real economy through fixed-asset investment, land conveyance, and preferential tax and fee policies. Guided by the government's macro-level orientation, manufacturing firms placed greater emphasis on long-term interests. This effectively constrained managers' financial speculation motivated by self-interest and promoted growth in manufacturing firms' investment in the real economy and the scale of their core business operations, constituting the primary driver of their return from finance to the real economy. This study provides empirical evidence for promoting the development of the real economy and advancing the construction of a modern industrial system.