How can pilot free trade zones affect regional technology innovation? –evidence from China at the city level

Abstract

ABSTRACT This paper examines the impact of pilot Free Trade Zones (FTZs) on technology innovation in China. Applying a multi-phase difference in difference (DID) model with the data from 280 Chinese cities during 2004 – 2019, covering 18 pilot FTZs, we found significant positive technology innovation effects of pilot FTZs. Specifically, the establishment of pilot FTZs has encouraged ‘substantive innovation’ through improving business environment, producer services agglomeration and financial development. Further spatial analysis shows that the innovation effect of the pilot FTZs has a positive spillover effect on neighbouring cities whose innovation capabilities are improved significantly, and thus narrows the innovation gap between cities. In terms of time dimension, the positive effect of pilot FTZs on innovation is immediate and continuously amplified. The above conclusions are robust using the placebo test, PSM-DID and control of provincial effects. The results provide important implications in extending the pilot FTZs to a wider coverage.