ABSTRACT This paper investigates how transportation infrastructure expansion shapes domestic value‐added ratios in exports by exploiting China's rapid highway network development. Combining a heterogeneous firm with firm‐level data, we demonstrate that improved market access significantly increases firms' DVAR. To address endogeneity and potential historical persistence, we employ an instrumental variable strategy based on Ming Dynasty courier stations and implement a Heckman two‐step correction to account for selection bias. Heterogeneity analyses reveal stronger effects for processing trade firms, non‐state‐owned enterprises, and firms in Eastern China. Crucially, we find that the stronger effects in Eastern China stem from the region's concentration of private and processing firms. Mechanism analyses identify two distinct channels: (i) a direct substitution effect, whereby highway expansion fosters domestic supply chain linkages; and (ii) the alleviation of information frictions, evidenced by the greater responsiveness of firms relying on standardised inputs. Furthermore, we show that supply chain adjustments are rapid and that improved connectivity induces a structural transformation, encouraging firms to transition from import‐dependent processing trade towards ordinary trade activities. These results highlight that domestic market integration is a critical pathway for industrial upgrading and reducing external dependency in global value chains.
Wang et al. (Fri,) studied this question.
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