Identifying the Sources of Agglomeration Benefits within China's Economic and Development Zones

Abstract

This paper examines the ability of place-based policies in China to foster agglomeration economies via Marshallian-based externalities that are expected to arise due to the reduction in transports costs associated with supplier-buyer linkages, labor pooling and knowledge spillovers. Empirically, I measure and quantify the relative contribution of each Marshallian source to the productivity of Chinese firms located in areas with and without economic and development zones (EDZs). I deal with the identification problem by exploiting temporal variations in the designation of EDZs, and matching techniques combined with a differencein- differences estimation approach. The results show that EDZ policy improves firm performance by fostering externalities that arise from each Marshallian channel, especially customer-buyer linkages. Moreover, EDZs that are designed to promote global-local linkages are more successful at moderating these agglomeration forces compared to those designed to promote domestic high-tech industries.