Returns to scale of Chinese cities, 2002–2009

Abstract

In this article 242 cities are analyzed and their returns to scale are measured. Many cities in Guangdong province have a long history of introducing foreign capital and are full of small companies owned by foreign and domestic investors. Decreasing returns to scale are shown in these congested urban areas. The cities under high decreasing returns to scale are located in the Pearl River Delta area in Guangdong province. Physical capital investment seems to have little positive effect on improving the situation of the cities under decreasing returns to scale. As an urban economy shows capital deepening, it moves nearer to or deeper into decreasing returns to scale zone. Even though it is not possible to know when an urban economy falls under a decreasing returns to scale condition, it is clear that an urban economy comes close to decreasing returns to scale zone when physical capital deepens.