Beyond the borders: Estimating the effect of China's Bonded Zones on innovation and its spillovers

Abstract

This paper investigates the direct and spillover effects of place-based industrial policies on firm innovation activities, with a focus on the establishment of Bonded Zones (BZs) in China. By exploiting the temporal, spatial, and industrial variations in the policy, we demonstrate that the establishment of BZs promotes significantly patent applications and citations of firms in leading industries located within and outside of BZs. We also provide suggestive evidence that the innovation spillovers are mainly due to competition among firms within and outside of BZs, namely, the Marshallian externalities.