Geographic Clustering and Resource Reallocation Across Firms in Chinese Industries

Abstract

We examine the effects of China's industrial clustering on resource reallocation efficiency across firms. Based on our county-industry level DBI index panel, we find that industrial clustering significantly increases local industries' productivity by lifting the average firm productivity and reallocating resources from less to more productive firms. Moreover, we find major mechanisms through which resource reallocation is improved within clusters: (i) clusters facilitate higher entry rates and exit rates; and (ii) within clusters' environment the dispersion of individual firm's markup is significantly reduced, indicating intensified local competition within clusters. The identification issues are carefully addressed by instrumental variable (IV) regressions.

Keywords: Competition, Industrial Cluster, Productivity Growth, Resource reallocation

JEL Classification: D2, H7, L1, O1, R1, R3