Dynamics of the Subnational Regional Effect: Evidence from China

Abstract

We investigate the dynamics of subnational regional effects (SREs) and how institutional access affects SREs over time using annual survey data of manufacturing firms in China from 1998 to 2007. SREs increase over time while China’s economy grows rapidly and globalizes and its institutions develop. This trend is explained by institutional divergence across regions over time. Institutional accessibility, consistent with its convergence over time, moderates the SRE growth. Based on proxies for institutions, we find evidence consistent with the institution-based theory as the cause of these dynamics. Our findings suggest that dynamics in institutions and institutional access are important in determining firm performance. Furthermore, local institutions and their importance can increase even as an economy develops due to institutional path-dependency.

Keywords: subnational regional effect; institution-based theory; institutional access; firm performance; dynamic profit components

JEL Classification: D02, O43, O53