Market segmentation, infrastructure construction and corporate tax avoidance in China

Market segmentation driven by local government protectionism raises concerns regarding the tax avoidance practices of regional enterprises. We examine how market segmentation among different provinces in China influences corporate tax avoidance under the construction of digital infrastructure at the provincial level and inter-regional high-speed rail. We show that market segmentation heightens information barriers for regional enterprises, thereby amplifying the tax avoidance motivations of listed companies. These findings remain robust even after addressing potential endogenous issues. The construction of a high-speed rail network and provincial digital infrastructure help inhibit corporate tax avoidance activities. Moreover, market segmentation more markedly boosts tax avoidance in firms with more non-local subsidiaries, where internal controls are weak, financing constraints bind, or management lacks overseas exposure. Overall, our results highlight the significant role of market segmentation in influencing corporate tax behavior and provide insights into policy interventions, such as infrastructure development, to mitigate its negative effects and promote a more transparent and efficient business environment.