The impact of pilot free trade zones on entrepreneurship: Evidence from a quasi-natural experiment in China

Abstract

Exploiting China's pilot free trade zones (FTZs) as an exogenous shock of institutional quality improvement, this study explores the impact of FTZs on urban entrepreneurship. We find that cities with FTZs are associated with higher entrepreneurship. The positive influence of FTZs is more pronounced in western and northern cities, and cities with high administrative levels. The entrepreneurship in service industries is promoted significantly by FTZs. In addition, FTZs foster entrepreneurship by promoting opening-up upgradation of foreign investment and foreign trade and financial development. We also identify the spatial spillover effects and find that entrepreneurship responses to pilot FTZs are significantly stimulated in adjacent cities without FTZs. Last, we show that Shanghai FTZ and Fujian FTZ, rather than Tianjin FTZ and Guangdong FTZ, play a non-negligible function in encouraging new firm creation. This study has important implications for FTZ's planning and spurring economic growth in developing countries.