Attenuation of Agglomeration Economies: Evidence from the Universe of Chinese Manufacturing Firms

Abstract

This paper examines the industry-specific attenuation speed of agglomeration economies and its interplay with the large presence of state-owned enterprises in China. We achieve this focus by taking advantage of unique geo-coded administrative data on the universe of Chinese manufacturing firms. The full-spectrum analysis also allows us to assess the goodness of fit of various spatial decay functional forms and to systematically evaluate the micro-foundations that govern the decay patterns across industry types. We obtain three main findings. First, agglomeration economies attenuate sharply with spatial distance in China, with large heterogeneity in the attenuation speed across ownership and industry types. Second, the spatial decay speed is positively linked with proxies for knowledge spillovers and labor market pooling but 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.