Provincial Market Opening, Local Government Investment and Manufacturing Structure Differences in China

Abstract

The convergence of manufacturing structure reduces the efficiency of resource allocation, which is a conundrum that has plagued China from a big manufacturing country to a manufacturing power for a long time. Using the panel data of manufacturing in 30 provinces and cities in China from 2000 to 2014, this paper empirically examines the game between market mechanism and government intervention in the optimal allocation of resources from the perspective of manufacturing structure differences. For the results of the entire sample, there is a U-shaped relationship between the opening of the international market and manufacturing structure differences, and after the opening of international market reaches a certain critical value, it will be conducive to manufacturing structure differences; domestic market opening optimizes the allocation of resources, showing a significantly positive relationship with manufacturing structure differences. On the contrary, local government investment has distorted the allocation of resources and has hindered manufacturing structure differences. The results of sub-regional estimation show that the opening of the domestic market has played an important role in promoting manufacturing structure differences in the eastern, central and western regions, showing the strong robustness, while the influences of international market opening and local government investment have distinct space differences. The market force in the eastern region shows greater effect than the government power on promoting manufacturing structure differences, and the government policy dependence in western region is more prominent. Further study finds that the role of the opening of the provincial market in promoting manufacturing structure differences has been undermined by local government investment because in the interaction between the opening of the provincial market and local government investment, both of they are mutually constrained.