Dynamics of the Subnational Regional Effect: The Role of Institutions and Institutional Access

Abstract

This study investigates the dynamics of subnational regional effects (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 converges over time and moderates SRE growth as predicted. Based on proxies for institutions and institutional access, we find evidence consistent with the institution-based theory as the cause of these dynamics. Our findings suggest that dynamics of institutions and institutional access are important in determining firm performance. Furthermore, the importance of local institutions 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