Attenuation of agglomeration economies: Evidence from the universe of Chinese manufacturing firms

Abstract

This paper quantifies industry-specific spatial attenuation of agglomeration economies by taking advantage of unique geocoded administrative data on the universe of Chinese manufacturing firms. The estimates of industry-level attenuation speed further allow us to systematically assess the goodness of fit of various spatial decay functional forms and to evaluate the micro-foundations that govern the decay patterns across industries. We obtain three main findings. First, agglomeration spillovers attenuate by about 90 percent on average from 0–1 km to 1–5 km in China, with large heterogeneity in the extent of attenuation ranging from 73 percent to 116 percent across industries. Second, the spatial decay speed is positively linked with proxies for knowledge spillovers and labor market pooling but is negatively linked with proxies for input sharing and the share of the state sector. Last, the inverse square distance decay function presents the best goodness of fit among the tested functional forms.