Trends and Determinants of China’s Industrial Aggl

TrendsandDeterminantsofChina’sIndustrialAgglomerationJiangyongLuCenterforChinaintheWorldEconomy,andDepartmentofBusinessStrategyandPolicy,TsinghuaUniversity,Beijing,China,100084Email:[e-mail]∗SchoolofBusiness,UniversityofHongKong,PokfulamRoad,HongKong,China852-28578223(office),852-28585614(FAX),Email:[e-mail]2007Abstract:ThispaperinvestigatestrendsanddeterminantsofthespatialconcentrationofChina’smanufacturingindustriesusingalargefirm-leveldataforthetimeperiodof1998to2005.ItisfoundthattheoverallindustrialagglomerationinChinahasincreasedsteadilyinrecentyearsthoughitisstillmuchlowerthanthoseofthewell-developedmarketeconomies(suchasUnitedStates,UnitedKingdom,andFrance).ItisalsofoundthatlocalprotectionismamongChina’svariousregionsobstructsChina’sindustrialagglomerationwhileMarshallianexternalitiesfacilitatetheprocessofspatialconcentrationofmanufacturingindustries.Onanoptimisticnote,thereisevidencethatthenegativeimpactsoflocalprotectionismhavebecomelesssignificantovertimebutthoseofMarshallianexternalitiesaregaininginimportance,whichisconsistentwiththeoveralltrendofChina’sindustrialagglomeration.Keywords:localprotectionism,Marshallianexternalities,industrialagglomerationJELclassificationcodes:L11,R12,R30.∗WethankEditorJanBruecknerandtwoanonymousrefereesforinsightfulcommentsandsuggestions,andtheUniversityofHongKongandCCWEofTsinghuaUniversityforfinancialsupport.1TrendsandDeterminantsofChina’sIndustrialAgglomerationAbstract:ThispaperinvestigatestrendsanddeterminantsofthespatialconcentrationofChina’smanufacturingindustriesusingalargefirm-leveldataforthetimeperiodof1998to2005.ItisfoundthattheoverallindustrialagglomerationinChinahasincreasedsteadilyinrecentyearsthoughitisstillmuchlowerthanthoseofthewell-developedmarketeconomies(suchasUnitedStates,UnitedKingdom,andFrance).ItisalsofoundthatlocalprotectionismamongChina’svariousregionsobstructsChina’sindustrialagglomerationwhileMarshallianexternalitiesfacilitatetheprocessofspatialconcentrationofmanufacturingindustries.Onanoptimisticnote,thereisevidencethatthenegativeimpactsoflocalprotectionismhavebecomelesssignificantovertimebutthoseofMarshallianexternalitiesaregaininginimportance,whichisconsistentwiththeoveralltrendofChina’sindustrialagglomeration.Keywords:localprotectionism,Marshallianexternalities,industrialagglomerationJELclassificationcodes:L11,R12,R30.21.IntroductionSince1978,Chinahasundergonedramatictransformationsfromacentrallyplannedeconomytoamarketeconomy.Alongwiththisprocess,therehavebeensignificantchangesinthegeographyofChina’sindustrialactivities.Before1978,almosteveryeconomicactivityincludinglocationchoicewascentrallyplanned,andthoseplanswerenotnecessarilydrawnaccordingtomarketforcesbutratherinfluencedbypoliticalconsiderations.Forexample,inthelate1960s,therewasadrivetorelocateproductionofkeyindustrialproductsfromcoastalareastointeriorprovincesinpreparationforwarswithneighboringcountriesandregions.Witheconomicreform,itisexpectedthateconomicforcesforindustrialagglomerationshouldhaveredressedsomeofpoorlocationchoicesofeconomicactivitiescausedbycentralplanningandplayedanimportantroleindeterminingChina’seconomicgeography.However,bothanecdotalevidenceandstatisticalanalysissuggestthatthesameeconomicreforminChinahasledtotheriseoflocalprotectionismamongChina’svariousregions,whichinturnslowsdowntheprocessofindustrialagglomerationaswouldhavebeendeterminedbytheeconomicforces.Indeed,akeypolicyintroducedinChina’seconomicreformisthatoffiscaldecentralization,underwhichthelocalgovernmentscansharetaxrevenuewithChina’scentralgovernment.Thispolicyisadouble-edgedsword,providingthelocalgovernmentswithstrongincentivesbothfordevelopingthelocaleconomyandforprotectinglocalfirmsandindustriesfromregionalcompetition.Basedonaggregatedsectoraldataandinter-regionalinput-outputtables,Young[44]andPoncet[36]arguethatlocalprotectionisminChinagrewmoreandmoreseriousoverthe1990s.Meanwhile,FanandWei[16]findthatboththepatternandthespeedofpriceconvergenceinChinaarehighlycomparablewiththosemeasurementsinwell-developedmarketeconomies,andthusprovidesupportfortheviewthattheChineseeconomyhasbeengraduallytransformedintoamarket-orientedeconomy.Usingindustry-leveldata,Bai,Du,Tao,andTong[6]showthedegreeofindustrialagglomerationinChinafirstwentdownandthenclimbedupduringtheperiodof1985-1997,andtheyalsofindthatlocalprotectionismhasgreatereffectsonindustrialagglomerationthanscaleandexternaleconomiesdoduringthatsampleperiod.ContrastingChina’scoastalareawithitsinteriorfortheperiodof1985-1994,FujitaandHu[18]findthatChina’sindustrialproductionshowedstrongagglomerationtowardthecoastalarea,andthatincomedisparitybetweenthetwoareashadbeenincreasing.3Theeconomicforcesforindustrialagglomeration,againstthoseoflocalgovernments’incentivesforprotectinglocalfirmsandindustries,makethestudyofChina’seconomicgeographyexcitingandchallenging.Inthispaper,weusealargedatasetofChina’smanufacturingfirmsfortheperiodof1998to2005tostudytheamalgamofeconomicandpoliticalforcesshapingChina’sindustrialagglomera