Inter-Basin Water Transfers and Firm Productivity: Evidence from China's South-to-North Water Diversion Project
Description
The core hypothesis is that the South-to-North Water Diversion Project, as a quasi-natural experiment improving water availability, significantly raises TFP of manufacturing firms in water-receiving areas. Data come from three sources (2010–2019): China’s National Tax Survey Database (providing output, value added, fixed assets, employment, water use, costs, assets, liabilities, age and so on); geographic data on the SNWDP and the data from Huang et al.(2025) (identifying Eastern and Middle Route trunk lines and defining receiving/supplying counties); and county-level meteorological data (from NOAA, using inverse distance weighting for annual temperature and precipitation). Additional data include prefecture-level per capita water resources (China City Statistical Yearbook) and the PPI index from the National Bureau of Statistics. The study employs a difference-in-differences strategy, attributing productivity changes in receiving areas relative to controls to improved water availability. Key findings: First, the SNWDP increases TFP of manufacturing firms in receiving areas by about 9%, significant at 1% and robust to various checks. Second, mechanism analyses show increased water use, higher capital-labor ratio, more fixed asset investment, lower operating costs, and eased financing constraints. Third, heterogeneity analysis indicates larger gains in water-scarce regions, water-intensive industries, small firms, and non-SOEs, with stronger effects along the Eastern Route than the Middle Route. Fourth, firms in water-supplying areas also experience significant TFP gains, with no adverse effects. Finally, a cost-benefit analysis based on a static payback model shows that considering only manufacturing productivity gains in receiving areas, the payback period is approximately 13 years, far shorter than the project’s designed service life.