The Impact of Place-Based Policies on Firm Performance: Evidence from China

Abstract

This study investigates the causal effect of the first round of China’s Great Western Development Strategy (GWDS) on the total factor productivity (TFP) of Chinese manufacturing firms employing the geographic regression discontinuity design. It uses the firm-level data from China’s Annual Survey of Industrial Firms (ASIF) database from 1998 to 2007. To follow the principle of the geographic regression discontinuity design and ensure the validity of our identification strategies, only firms within a 10 km radius on either side of the GWDS boundary were retained in the baseline regression. The main results include some of the following: (1) The GWDS increased the TFP of firms on the western side of the boundary in the range of 11.2% to 13.7%. (2) The main mechanisms of this improvement were identified as the reduction of a firm’s actual income tax rate and increased firm investment in high-quality human capital. (3) The GWDS has a greater impact on private firms, small firms, and labor-intensive firms. This study provides reliable evidence that place-based policies can promote the sustainable development of firms within the affected regions, and could serve as policy inspiration to alleviate regional development disparities in other developing countries.