Heterogenous Impacts of China's Economic and Development Zone Program

Abstract

This paper evaluates the causal relationship between economic and development zones (EDZs) and the productivity of a large sample of incumbent firms in China. I take into account possible different selection mechanisms across two popular types of EDZs – economic and technological development zones (ETDZs) and high-tech development zones (HTDZs) – by relying on multiple treatment propensity scores matching techniques. Applying a difference-in-differences estimator to the matched sample, the main findings are as follows. First, compared to non-targeted firms, a new HTDZ increase productivity gains, on average, of up to 20.8% for incumbent firms in the five years after the zone was created, compared to 16.2% for incumbent firms in a new ETDZ. Second, compared to non-targeted firms, lower productivity firms benefit less compared to their higher productivity counterparts from the creation of a new ETDZ (or HTDZ), at least initially, but subsequently go on to exhibit larger learning effects in later years. Third, being located in an area with a higher local industrial relatedness initially increases the magnitude of productivity spillovers in both types of EDZs, due to better access to input-output linkages, labor pooling and knowledge spillovers. These findings suggest that the size of productivity spillovers for spatially targeted firms differ quite significantly depending on the strategic development and policy goals of the EDZ, as well as by the firm’s own characteristics and location.