Multi-product firms, product scope, and the policy of export tax rebate

- We emphasize the importance of product cannibalization on export firms' product scope.
- We analyze the impact of ETR changes on firms extensive margin.
- A country's comparative advantage plays a significant role in exporting firms' product contraction decision.
- We find that Chinese exporting firms contract their product scope in response to ETR reductions.
- Exporting firms engaging in ordinary trade and processing trade respond differently to ETR changes.

This paper extends the model of Nocke and Yeaple (2014) to analyze the impact of the export tax rebate (ETR) changes on multi-product firms' product scope. In response to ETR changes, firms optimally reallocate their organizational capital, and adjust the intensive and extensive margins of production. We test the model's predictions using firm-level export and ETR data from China. We find that less profitable products, facing larger ETR reductions, and products in which China has a comparative disadvantage, are more likely to be dropped.