DP14506 Geographic Clustering and Resource Reallocation Across Firms in Chinese Industries

Author(s): Di Guo, Kun Jiang, Chenggang Xu, Xiyi Yang
Publication Date: March 2020
Keyword(s): Competition, Industrial Cluster, Productivity Growth, Resource reallocation
JEL(s): D2, H7, L1, O1, R1, R3
Programme Areas: Industrial Organization, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14506

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.