Abstract
This paper measures inter-provincial market fragmentation by adopting an adjusted priced-based approach from the Law of One Price using a three-dimensional panel of annual price on eight goods across 31 provinces in Mainland China during 1999–2015. By using the system Generalized Moment Estimation (GMM) approach, we analyze the non-linear effect of inter-provincial market fragmentation on regional economic development and its differences in various regions and periods. By constructing a Cross-Terms Model, we analyze the influence of various motivations of provincial governments on the non-linear relationship between inter-provincial market fragmentation and regional economic development. The results show that (1) Chinese domestic market fragmentation appears to have caused a fluctuating decline during 1999–2015. (2) The inter-provincial market fragmentation imposes an inverted U-shaped influence on regional economic development. It is necessary to maintain moderate market fragmentation for the promotion of regional economic development. (3) It is beneficial to maintain a lower degree of market fragmentation as time goes on. It is necessary to maintain a lower degree of market fragmentation in Eastern and Central China compared with Western China. (4) Compared with Social Stability and Official Positions Promotion, the motivation of Fiscal Revenue Enhancement requires the maintenance of a lower degree of inter-provincial market fragmentation for regional economic development.
Highlights
Domestic market fragmentation in China has always been an essential issue of academic concern [1,2,3]
Why do provincial governments in China still tend to choose the strategy of market fragmentation? The possible reason is that market fragmentation may have a positive effect on regional economic development, which is different from the negative effect on national economic development
Is the positive effect of inter-provincial market fragmentation on regional economic development stronger than its negative effect? We argue that the inter-provincial market fragmentation imposes an inverted U-shaped influence on regional economic development
Summary
Domestic market fragmentation in China has always been an essential issue of academic concern [1,2,3]. There are generally two reasons that lead to domestic market fragmentation: One is geographical distance, and the other is the border effect of government intervention and local protectionism. The inter-provincial market fragmentation caused by the border effect still has an important impact on the regional economic development in China. This paper tries to investigate the non-linear effect of inter-provincial market fragmentation on the regional economic development in China. The possible reason is that market fragmentation may have a positive effect on regional economic development, which is different from the negative effect on national economic development. We argue that inter-provincial market fragmentation has both positive and negative influences on regional economic development in China.
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