Local economic structure, regional competition and the formation of industrial land price in China: Combining evidence from process tracing with quantitative results

Abstract

The price of industrial land in China has been found distorted and remarkably low. However, it is overlooked that industrial land price is relatively high in some regions. This local variation cannot be explained by classical theories on land price that focus on local economic level, population density, and location factors. We propose a theoretical framework incorporating local economic structure and governments’ behavior in regional competition, to interpret the formation of industrial land price in China. We first model local firms as foot-tight ones, whose relocation costs are enormous, and outside firms as foot-loose ones, whose relocation costs are negligible. Then we divide local governments as outside-capital-dependent governments (OCDGs) and non-outside-capital-dependent governments (NOCDGs) according to the role of outside capital in local economic structure. In such a setting, OCDGs are supposed to aggressively pursue outside firms and use industrial land as a critical endowment to engage in race-to-bottom competition, making the price extremely low. On the contrary, the optimal strategy for NOCDGs, who lack strong incentives in attracting outside investment, is to stay aside and let potential land users compete to determine the land price, resulting in a higher land price. Evidence from quantitative results and comparative case studies with process tracing based on Suzhou and Wenzhou together prove the validity of this theory. This paper advances the conventional understanding of industrial land price and concludes with implications on industrial land policies and sustainable development.